Inflation in Turkey and its impact on the real estate market
It is known that Turkey during the past three years was not successful in economic terms at first glance, as inflation rates during 2018 reached the highest level of 25%, in 2019 at the highest level of 19.5%, and in 2020 at November 14.5%, knowing that the inflation rate from 2005 until 2018, at the annual value, did not exceed 10%.
What is the reason for this inflation? Is this a criterion for the weakness of the economy? What is its impact on the real estate market?
Inflation is a term associated with the economy and means a significant increase in the general level of prices of goods and services, which leads to a decrease in the value of the currency (its purchasing value), as this affects the cost of financing for companies, the ability to maintain profits and the capital used in them, and it affects the cost of living for the general individuals, as well as the appropriate monetary authority for the state, and inflation is measured in several ways depending on the types of goods and services, and inflation is the opposite of deflation, which means a general decrease in the prices of goods and services, and this occurs when the inflation rate falls to less than 0%, and inflation is referred to as a percentage.
We notice from the previous graph the rates of inflation during the past four years, where the significant rise began during 2018 and maintained high rates in 2019 and 2020, and to understand the issue more deeply before starting to analyze it, we can observe the graph below:
It is clear that looking at the past 25 years, the inflation rates before 2005 were so tremendous that in 1996 they reached more than 100% within one year and then began to stabilize from 2005 until 2018 as we mentioned above, and now we can start answering the questions that we brought up above:
What caused this great inflation during the last three years?
The obvious direct reason for this inflation is the difference in the exchange rate of the Turkish lira against the US dollar, as the exchange rate in mid-2018 was 4.5 Turkish liras per dollar and in September of the same year the exchange rate reached 7 Turkish liras per dollar and this means that the value of the local currency decreased by 55 % within only 3 months, and this has greatly undermined the confidence of foreign investors, despite the improvement of the lira after that, to close in 2018 at an exchange rate of 5.56 for every dollar.
This great inflation that occurred in 2018 was of purely political reason, as the Turkish government detained the American priest Andrew Brunson because of his participation in the attempted coup in 2016, and upon his immediate release, the Turkish lira recovered again and this clearly indicates that the inflation that occurred has a political reason only and it has no indication of the weakness of Turkey's economy.
We can look at the graph below to monitor the sharp rise in the exchange rate in 2018 and then decline again.
Since that time, the Turkish lira has performed weaker due to negative political events (participation in wars on several fronts, including Armenia and Libya, and in Syria against Russia, and oil exploration in the Mediterranean in the common border with Greece, etc.) and provides better performance when political events are in Turkey's favour (victory in the Armenian war, reconciliation with Russia, progress on the Libyan front, and also easing of tension with Greece, etc.).
It is worth noting, according to recent statements by Turkish President Recep Tayyip Erdogan, that the coming years will be Turkey's plan to work towards achieving financial stability, price stability, and easing inflation rates.
And now the second question: Is this inflation a measure of the weakness of the Turkish economy?
Let's first define how any economy is evaluated so that we can answer the question:
In economics, gross national product (GNP) is a measure of the volume of economic production of goods and services from resources owned by the inhabitants of a particular region in a given period of time (even if this economic production takes place outside that region). It is one of the measures used to measure the national income and public expenditures of countries.
The concept of gross national product is similar to the concept of gross domestic product (GDP), except that the gross domestic product calculates the value of goods and services produced from locally existing resources, while the gross national product calculates the value of goods and services produced from locally-owned resources, and the difference is important.
For example, the value of the production of a Chinese factory in Jordan is included in the Jordanian GDP because the factory is located locally on Jordanian soil, but it is included in the Chinese gross national product because the owners of the factory are Chinese, so the Chinese factory is a resource that is located locally in Jordan and is locally owned in China.
If we look at the ranking of Turkey according to the countries of the world with a gross national product, we will notice that Turkey is in continuous progress and in 2020 it reached the number 13 rank in the world, and by the year 2023, Turkey is seeking to enter the ranking of the top ten largest economies in the world and therefore high inflation rates are not relevant. Corresponding to the GNP, on the contrary, the devaluation of the Turkish currency against foreign currencies gives great facilities in exporting to foreign countries at competitive prices.
And finally, let's move on to the third question: What is the impact of high inflation rates on the Turkish real estate market?
The Turkish real estate market consists of two components: the local and the foreign, and the local part of the Turkish real estate market constitutes approximately 97% while the foreigner is 3%. To answer the above question, the target market must be determined from the real estate purchase process, and also the location of the property itself has great importance in determining the impact of inflation on real estate.
For the beginning of the local market, high inflation rates negatively affect the consumer price index and thus negatively affect the demand, whether when buying back or leasing, we will define the consumer price index first:
The consumer price index is an inductive number or a statistical indicator that measures the changes that occur in the general level of prices, based on tracking a 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 that country.
National bodies in charge of statistics track the development of these prices in the major urban centres of the country concerned, monitor them over time, and measure their change from one period to another (month, season, or year).
We notice from the last three years that the percentage of change in the consumer price index has high values, reaching 21.62% in 2018, 10.58% in 2019, and 14.03% in 2020, and it is closely related and not directly related to the rate of inflation.
Returning to the topic, we say that the local market is negatively affected by high inflation rates because it has a negative impact on the consumer price index.
As for the foreign market (meaning that the target market is people who deal in a foreign currency other than the Turkish lira), the high rate of inflation will never affect the buying and the rental habits for them, and sometimes the high rate of inflation may have a positive impact as buying and renting real estate becomes cheaper when compared their foreign currency with the Turkish lira.
Finally, regarding the real estate site itself, it is very important, so buying a property under construction with the aim of investing and reselling it later has a close relationship in the real estate site itself and with the presence of high inflation rates, it is more important that the property is in a place that has a high demand for later sale and the surrounding real estates are few, in order to ensure that the prices are kept high.
You can get a free consultation by contacting our company to clarify the most suitable locations for investment properties.
Also, in case that the investor wants to obtain a steady, high rental return by purchasing a property immediately ready for leasing, then the location of the property also plays a very important role in determining the value of the rent in the area, for example, buying a property far from the center of Istanbul, the demand for it will be low and the supply is much. The rate of decline in the value of the lira against the dollar in a year was 30%. The rent value of this property will not increase to more than 10% because the demand is already small. As for real estate in the center of Istanbul, if the property is chosen correctly, the rent is evaluated based on demand and it is already high, and therefore the rent value may rise even higher than the rate of inflation.
If you want to own a property in Turkey, Right Home provides you with free consultations based on a solid ground of deep knowledge and diligent follow-up of real estate, economic and political developments in Turkey.