A look at potential impact of Turkey’s new mortgage law
Posted by meb at March 19th, 2007
The new mortgage law will affect retail loan growth, insurance and real estate sectors and the reach of the central bank, when expected mortgage demand begins
Turkey’s first ever mortgage law, approved last month after a long-delay, is seen long-term as a way to increase access to home ownership for middle- and lower-income Turks. The law allows lenders to offer variable-rate mortgages that can then be bundled into securities and taken off bank’s balance sheets. It makes a major change in a country of 74 million that suffered a severe financial crisis as recently as 2001.
But with benchmark interest rates of 17.50 percent – cranked 4.25 points higher last year to rein in inflation and a sliding lira – and monthly rates for current housing loans above 1.5 percent, demand for mortgages is seen limited for now.
This time last year, before Turkey’s mini-crisis, demand for housing loans was strong with monthly rates of around 1 percent, and several experts expect the market to start swelling once rates go back to those levels.
Speculators contend that the newly-allowed mortgages will be slow to take off in Turkey, but that once they do they will spur banks’ competition and growth, fuel an already booming housing market and increase the central bank’s leverage over the population.
“I think there will be gradual growth with gradual reduction of interest rates, but we know that when rates were about 1.0 percent per month the volumes were substantial,” European Housing Finance President Pamela Lamoreaux told Reuters.
Legislation for the secondary market – key for the primary market – has not been hammered out yet and experts do not expect it to be in place for three to six months. They also do not expect the first securitization until next year.
“I think we could see the first issue of mortgage-backed securities or covered bonds at the beginning of 2008,” Umur Guven, head of housing finance at Garanti Bank, told Reuters.
Standard & Poor’s, however, reckons the first deal could happen as early as this year, although likely to be small, offshore and in foreign currency. Zeynep Adalan, a director there, says ratings for the deals could be higher than Turkey’s sub-investment grade sovereign rating, as has happened elsewhere.
Risk shift:
The law crucially allows banks to off-load the interest rate risk to customers by lending at variable rates rather than the fixed rates they use now for housing loans.
Because of high rates and a last minute decision to remove tax incentives from the law, mortgages are no longer seen having a massive short-term impact as once thought.
But the growth potential is huge as penetration rates in Turkey are very low: housing loans account for less than 5 percent of the $380 billion economy compared to an average of around 50 percent in the EU-15.
“Once it takes off it’s going to be the single largest driver in absolute terms of retail loan growth for the next five to 10 years,” Credit Suisse analyst Yavuz Uzay said.
Commerzbank’s property arm Eurohypo said last year it would double new business in Turkey this year to 1 billion euros.
Banks are likely to use attractive mortgages to hook clients onto other products and thus grab market share, but competition is going to be fierce, and focused on price.
“Abnormally high margins shouldn’t be expected because it’s going to be high-growth for a long time and Turkey has one of the most competitive banking markets,” Uzay said.
Also set to benefit is the insurance sector – which is enjoying increased interest from foreigners – as mortgages will need associated insurance.
Real estate will receive a boost, with sector experts forecasting that once rates fall, the subsequent demand for debt and housing will fuel house price rises.
And as home ownership grows the reach of the central bank, whose job is to target inflation in a country with a history of hyperinflation, will grow as rate changes will soon be felt in householders’ bills.
“When you feel it yourself on your mortgage loans you become more aware of it,” said Simon Quijano-Evans, economist at CAIB, a finance advisory firm. “The central bank’s task of sending messages to the population will become that much more effective.”
source: Emma Ross-Thomas / ISTANBUL – Reuters via Turkish Daily News
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