Nicholas Birch -

Turkish banks increasingly see private loans as a profitable way forward.

Finding evidence of the inflation that sapped Turkey's economy for 40 years used to be easy: you just had to look at a bank note. Now with all those zeros gone from the currency, perhaps the best way is to take a drive through the shanty-towns that surround Turkish cities, the result of a mass rural exodus, insufficient housing stock and testimony to the near impossibility of a getting a long-term loan in a country where inflation rates once reached 125%. That difficulty with long-term loans, though, may eventually go the way of inflation.

As late as 1999 the total Turkish mortgage market was only worth €17 million. But with inflation at a 37-year low of 7.9% and still falling, Turkish banks increasingly see private loans as a profitable way forward. Small wonder, then, that mortgages issued in 2005 totalled €6.15 billion, a 600% increase on the previous year, according to the country's central bank.

And analysts have no doubt of the market's potential for further growth. Even now total mortgage loans only make up 2.7% of Turkey's GDP, compared with nearly 40% in EU countries, and 70% in the US. The Turkish Association of Real Estate Investment Companies, GYODER, expects Turkish mortgages to top $100 billion by 2015, some 15%-20% of predicted GDP.

The question is whether the Turkish banking system, which currently hands out housing loans as consumer credits, is capable of sustaining such growth on its own.

According to Dogan Cansizlar, head of Turkey's Capital Markets Board, the answer is an emphatic “no”. Cansizlar told conference delegates in Ankara this March that when the mortgage issue first appeared on the agenda around 2002, long-term housing credits made up only 0.3% of total Turkish bank sector credits. Now they are at 11%.

“It is not possible to continue financing mortgages of between 5 and 20 years with short-term customer deposits, as some Turkish banks are doing,” he said.

Tevfik Turel, director of the Eurasia and Middle East region for real estate group Stewart International, agrees that the mismatch between banks' maturity of loans is reaching “dangerous proportions.”

WHERE'S THE BILL?

With Turkish banks increasingly using alternative funding mechanisms such as longterm credits from the European markets, most Turkish bankers think such concerns are exaggerated. But they agree new legislation is essential if international capital is to become a major player in the Turkish mortgage market. “It will ensure legal and financial stability and reliability, and open the door to funding mechanisms that are currently unavailable,” says Gokhan Mendi, deputy director of Finansbank.

Here lies the rub. Completed early last year by the Capital Markets Board, a new draft housing-finance law was due to be passed by Parliament last summer. When that date passed, analysts talked of a deadline last December.

Optimists are now predicting ratification this May, with the law going into force this September. Some have found the delay baffling.

Providing as it does for the establishment of a secondary market of mortgage finance companies issuing asset-backed and mortgagebacked securities, domestically and internationally, the draft law should enable banks to provide long-term loans to far more people than currently benefit.

Monthly interest on 25-year loans dropped from 2.5% in 2004 to 1.1% today, and analysts expect rates of 0.8% by the end of 2006. That's low enough to be attractive to the economically modest support base of Turkey's present government.

Is the delay a sign the government has lost interest, as some analysts claim? Mortgage expert and chief drafter of the bill Bahadir Teker doesn't think so. “These are busy times for the government, particularly with the IMF pushing it on social security reform, plus bills on income tax and capital markets,” he says. “Mortgages are only a medium priority.”

In any case, analysts think the delay has provided valuable extra time to fine-tune the details of Turkey's future mortgage system. Most of the disagreements concern tax.

TAXING SITUATION

For a start, the Capital Markets Board wants to see mortgage installments deducted from income tax, something the Treasury is unwilling to accept, according to Kerem Tezcan, a real estate analyst with Raymond James Securities.

Bahadir Teker is far more concerned that a 15% withholding tax slapped on Turkish securities since the beginning of this year will affect domestic mortgage-backed securities too. “We don't have the capital in Turkey, so most capital has to come from outside,” he says. “But this tax makes it impossible for domestic banks to compete with outsiders. It makes all the work done up to today a complete waste of time and paper.”

There are also concerns that despite the rapid drop in interest rates, rapidly rising house prices in Turkey are conspiring to keep mortgages out of reach of most consumers. Individual mortgages averaged over €50,000 in 2005.

“A mortgage system is all very well, but it will not work in the absence of a welldesigned housing market,” says Onder Halis Demir, the Turkish banking association's representative in ongoing discussions on the bill. The shortfall of housing units in Turkey, he notes, is around 2.5 million.

Omer Celebi, the head of personal loans at Isbank, says a well-designed mortgage system would promote its own financing for new housing projects. Unfortunately, he says, the Turkish bill is not well-designed.

“Along with the seller, housing finance institutions are currently held responsible to buyers if the house is defective or undelivered,” he explains. “This joint responsibility will limit banks from financing new projects.”

A flourishing housing market may be desirable, but it looks as though a lot of work needs to be done between now and the bill's passage through Parliament later this summer before it becomes a reality.