Economic inflation in Turkey and its impact on the real estate market

Considering the negative repercussions resulting from theCoronavirus,which cast a shadow over most countries over the world, we may realize the presence of positive rates in Turkey in terms of a high growth rate with a noticeable increase inexportsin general, in addition to the continuous development in various industries.

But on the other hand, we note that the Turkish lira is suffering from an undisputed decline, and due to the instability of the exchange rate, many dealers with Turkey have recalculated over and over, the result of this conflict was high inflation rates, which have negative repercussions (economically and socially), especially on thereal estate sector in Turkey.

The phrase (the exchange rate of the Turkish lira against the dollar)has become the leading phrase for all search engines on the Internet, especially for those interested in the Turkish real estate market or those interested in buyingapartments for sale in Turkeyin general, There has been a lot of discussions and controversies about a key point: Is the idea of buying a property in Turkey now is a good idea, especially after the sharp depreciation of the Turkish lira, or an idea like this is a kind of risk-taking and economic suicide?

In these lines, by addressing some questions and answers, we try to clarify the aspect of the inflation issue, its causes, and its negative repercussions (especially on the real estate sector), as well as the proposed solutions, to confront this problem.

Notice: We should mention here thatreal estate sales in Turkey to foreign investors increased by 81.5% in the first quarter of this year compared to the same period of the last year.

What is the reason forinflation's emergence in the Turkish economy?

According to data issued by theTurkish Central Bank, the inflation rate in September 2021 reached 19.85%, which is a high rate indeed, and the government aims to reduce it to 16% by the end of 2021, but if we analyze the economic state, we will find that inflation in Turkey is generated by offerings and demands as well, that means the interest rate is still at a high level, even after it was reduced to 18% last September. The high-interest rate leads to an increase in production and service costs, especially if the economy depends on bank credit in the first place.

On the other hand, the depreciation of the local currency leads to a decrease in its purchasing value, and thus increases inflation on the demand side.

The main concern during the upcoming period, in light of the trend of oil prices to rise, will be the continuous increase in the inflation rate for a long period, Unless the government seeks to eliminate other causes of inflation.

Perhapsthe policy of reducing interest rates is one of the best tools to face the problem, but in the case of Turkey, it needs to be gradual, taking into account an amount of time that does not cause a state of anxiety among savers and holders of foreign currency.

Important facts about the real estate market in Turkey:

Before we discuss the subject of economic inflation in Turkey and what are the most important elements for dealing with it, we must mention some facts supported by numbers and statistics about the real estate market in Turkey in terms of its features and characteristics.

• The real estate market in Turkey is considered to be a local market in general, as it depends on foreign investors by only 1.59%. This is according to the statistics of the Turkish Statistical Institute. The authority stated that during the period from January to August 2021, the number of homes sold to foreigners reached 30,849 from a total of 450,320 properties.

• Real estate pricing in Turkey depends on many factors, perhaps the most important are: cost, project implementation period, view, location, payment plans, offer and demand, and finally the factor of foreign investment in the real estate market, which is one factor in a group of factors that may be affected by the issue Economic inflation.

• It is obvious that after this inflation the real estate purchasing ability for the Turkish families have been decreased significantly, especially after the Turkish government had made the value of the interest rate on real estate loans reach 2% per month, and therefore the local demand for real estate purchases will decline, and this decline will ensure that real estate prices will not rise In Turkey at least for the next six months.

• In general, real estate capital doubles in the long term, as investing in real estateis considered one of the safest and most profitable types of investment not only in Turkey but in the whole world.

It is known that the return on investment in the Turkish real estate market should be calculated in the medium-long term not in the short term, as the Turkish real estate capital cycle should not be less than 7 years when calculating the ROI.

How does the Turkish real estate market is affected by high inflation rates?

As we mentioned previously, the Turkish real estate market consists of two ethnic components, the local, which constituted the vast majority of the market share, and the foreign component, which does not exceed 2% of the entire market.

To answer this question, the criteria that affect each component in the process of buying a property in Turkey and how it is affected by the high inflation in Turkey must be determined.

Let's start with the local component. The high rate of economic inflation certainly affects the consumer price index negatively which will affect the demand negatively, whether in repurchasing or leasing, and here it is necessary to explain the concept of (consumer price index), which is an indicative number or a statistical indicator that measures the changes occur in the general level of prices, based on tracking basket that includes all goods and services consumed within a particular country, and the composition of this basket is supposed to reflect the structure of household consumption spending in this country.

In other words, this indicator represents the purchasing capacity of the individual within a particular economy during a high rate of inflation.

During the last three years, we notice that the rate of change in the (consumer price index) has become of high values which are closely related to the rate of inflation.

Therefore, we can conclude that the local market is negatively affected by high inflation rates because it hurts the consumer price index.

In the case of the foreign component ( the real estate market is targeted by people who deal with foreign currencies), we will find that the high rate of inflation does not affect theprocedures of buying, selling, or renting for them, rather it has a positive effect as the cost of buying or renting real estatehas become less when Comparing the value of the property in Turkish lira with its foreign counterparts.

What are the best solutions to face high inflation in Turkey?

The monetary policymaker faces several obstacles when dealing with the problem of inflationwithin its two sides, offer and demand, as graduality is required here. and one of the most important tools to confront inflation is to create a state of trust with the members of society, as the government seeks to achieve their interests, to face the problems of "dollarization", or compactness; Or in other words, converting the Turkish lira into foreign currencies or precious metals and keeping them as a kind of savings.

Other procedures to face inflation could be considered here like reducingthe value of private-sector borrowingfrom abroad, focusing on partnership financing, giving more space to Islamic finance, encouraging individuals to deal apart from foreign exchange, and making transactions with local currency only.

At this point, we cannot ignore the issue ofspeculation on the exchange rate (price), in which foreign and local hands join forces to weaken the lira. It is not acceptable for Turkey to have such a strong economy and at the same time have these high rates of inflation.

In this article, we tried to discuss the issue of high inflation rates in Turkey, as we tried to answer several questions about this topic, such as the main causes leading to inflation, the impact of this process on the Turkish real estate market in general and on foreign investors in particular, with a detailed explanation for the most important characteristics of theTurkish economy.

 we also tried to present the best solutions and measures that can be taken to reduce the process of economic inflation in Turkey.

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