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Erdogan’s mortgage incentives threaten to stoke inflation

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A loan package to encourage home sales announced by President Recep Tayyip Erdogan last week threatens to further fuel consumer inflation in Turkey, which is already on track to hit an annual rate of 100% in the coming months.

The Erdogan government has failed to set out a convincing program to curb inflation, instead relying on brash growth-boosting measures to assuage popular economic grievances ahead of next year’s election. Housing and construction were Erdogan’s favored sectors, driving economic growth for years before falling into dire straits amid the country’s financial woes in recent years.

On May 9, Erdogan unveiled a package of relatively cheap loans to encourage home purchases and support struggling construction companies. Still, the low- and middle-income masses had little to cheer about, as the terms of the program make the loans affordable only to buyers with deep pockets, not to mention the immediate spike in already soaring home prices. after the announcement of the package.

The government’s decision comes at a time when the beleaguered Turkish lira has fell again, fostering new inflationary pressures. Annual consumer inflation in Turkey reached 70% in April and is expected to increase further in the coming months. If the rise in prices continues at the same rate, annual inflation should reach 100% in July. The government has all but caved in to inflation by abandoning the central bank interest rate tool as a means of controlling prices. The bank has kept its key rate at 14% since December after cutting it by 500 basis points over four months, heeding pressure from Erdogan who insists on the unorthodox view that high interest rates lead to high inflation.

The construction sector contributed up to 8.5% to Turkey’s gross domestic product at its peak under Erdogan, but its share has fallen sharply since 2017, shrinking to 5% in 2021. Many investments have stalled amid soaring construction costs due to the depreciation of the lira, and inflation-hit public projects have lost much of their appeal to contractors, leading to grumbling growing in the sector.

In an effort to boost the morale of some companies, the Erdogans package allocated a 20 billion lira loan facility (nearly $1.3 billion) for builders who have completed at least 40% of a housing project and have not yet sold at least 50% of the houses. The three-year loans will be issued by public banks with a monthly interest rate of 0.89%, a very generous rate given that monthly inflation exceeded 7% in April.

Additionally, Erdogan announced 30 billion lira ($1.9 billion) in funds for the government’s housing development agency to finance social housing projects for citizens of low income group.

In the second leg Of the package, state-owned banks are offering loans to first-time buyers buying first-hand homes for up to 2 million liras ($128,000), with a 10-month maturity and 0.99% monthly interest. Loans in this category are expected to stimulate demand for new homes in provincial areas rather than in major cities.

The third leg aims to encourage those who have placed their savings in hard currency or gold to convert their assets into lira. Accordingly, buyers of houses worth up to 2 million lira who repay at least half the price by converting hard currency or gold placed in bank accounts before April 1 are eligible for home loans. a maximum term of 10 years and a monthly interest of 0.89%.

In sum, alleviating the problems of construction companies, supporting investment in housing and stimulating demand for housing is what matters to Erdogan, apparently without taking into account the impact of the movements on housing prices and inflation in general.

In February, house prices in Turkey were up 96% from a year ago, with a peak exceeding 106% in Istanbul, the country’s largest city, according to central bank data. For comparison, rates stood at 14% and 10% respectively in February 2020. This meteoric rise was driven by both a contraction in supply in the housing market and a buying frenzy at the wealthy came to invest in housing to protect their savings from the fall of the lira and inflation.

In another move that is expected to inflate house prices, Ankara has raised the threshold for a citizenship-for-ownership program for foreign buyers. Foreigners are now being promised Turkish citizenship in exchange for buying properties worth at least $400,000, up from $250,000 until recently. Nearly 20,000 foreigners acquired Turkish citizenship under this program from 2018 to 2021, according to the Ministry of Environment and Urbanism.

With house price increases outpacing consumer inflation by about 30 percentage points, the housing sector appears to be headed for chaos. Price increases are unlikely to subside amid supply shortages caused by the stalling of investments due to soaring costs. Official data show the cost of constructing buildings rose 98% year on year in March, while building material prices rose 124%, a major factor discouraging both new investment and the completion of existing investment .

According to Erdal Eren, head of the Union of Entrepreneurs of Turkey, the demographics of the country require the construction of at least 850,000 new houses per year, but this number has fallen to around 450,000 in recent years. As a result, robust demand drove prices up at a breakneck pace.

Erdogan’s incentive package is sure to further stimulate demand and push prices even higher. Many experts agree that his decision amounts to adding fuel to the fire of inflation. And with rent prices lagging behind rising house prices, housing is becoming all the more difficult for millions of families overwhelmed by inflation.

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2/ https://www.al-monitor.com/originals/2022/05/erdogans-home-loan-incentives-threaten-fan-inflation

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