Turkey: Selected Issues

This Selected Issues paper on Turkey reviews a decline in private saving and adoption of a fiscal rule. As economic confidence has improved, capital inflows have surged while private saving has fallen. Together, these developments have produced current account deficits and a strong lira, raising concerns that Turkey may be exposed to sudden reversals in investor sentiment. A fiscal rule with appropriate mechanisms to monitor its compliance should deliver predictable policies, thus allowing further reductions in debt and risk premiums, thereby contributing to macroeconomic stability.


This Selected Issues paper on Turkey reviews a decline in private saving and adoption of a fiscal rule. As economic confidence has improved, capital inflows have surged while private saving has fallen. Together, these developments have produced current account deficits and a strong lira, raising concerns that Turkey may be exposed to sudden reversals in investor sentiment. A fiscal rule with appropriate mechanisms to monitor its compliance should deliver predictable policies, thus allowing further reductions in debt and risk premiums, thereby contributing to macroeconomic stability.

V. Economic Implications of Turkey’s New Mortgage Law

A. Introduction

1. Turkey recently passed important new mortgage market legislation. The new law improves, and in part liberalizes, the regulatory infrastructure for the origination of loans. It strengthens the legal protection of mortgages and, at the same, widens the range of permitted instruments (adjustable interest rate mortgages). Importantly, it also establishes the framework for a secondary market, providing mortgage lenders with new funding options via the pooling and securitization of mortgage-backed loans (Box 1).

2. This chapter analyzes how the emerging mortgage market may affect Turkey’s economy. The international experience shows that mortgage finance not only plays an important role in the functioning of housing markets, but can also affect a country’s financial and overall economic performance. Mortgage markets can support long-term growth, but they can also reinforce cyclicality and possibly contribute to swings in asset prices. This implies new challenges for policymakers and financial regulators.

B. Growth Prospects for Turkey’s Mortgage Market

3. The international experience suggests that Turkey’s mortgage market could expand rapidly if macroeconomic stability and low inflation become entrenched. There are many country examples where the liberalization, or introduction of mortgage legislation, combined with favorable macroeconomic and certain other conditions have led to rapid mortgage market growth (Box 2). All the factors that seem relevant for such growth could also come into play in Turkey:

  • Adequate legal framework for mortgage lending. The new legislation improves the conditions for mortgage lending and introduced new options to fund such lending. While necessary sub-regulations must still be issued, the law has prepared an adequate legal basis for a well functioning mortgage market.

  • Lower interest rates as inflation declines. Housing loans reached year-on-year growth of over 300 percent in 2005, when inflation had dropped to single digits for the first time in over 30 years and interest rates were still relatively high.1 Lending slowed after interest rates were hiked in mid-2006 in response to rising inflation and financial market turbulence. However, the earlier boom gives some indication of the potential mortgage lending surge if inflation and interest rates return to a declining path.

  • Rising disposable income. Disposable income is rising in Turkey on the back of robust economic growth and rising employment. This raises households’ capacity to service mortgage debt, an important factor driving mortgage growth in the EU accession countries.

  • Competition in a growing financial sector. Turkey’s banking sector is expanding rapidly and switching from holding government bonds to private sector lending. The entry of foreign banks has intensified competition particularly in consumer lending, where mortgages plays a central role.

  • Housing needs fueled by demographic pressures. Much of Turkey’s existing housing stock is inadequate, while an annual population growth of 1½ percent creates large needs for new dwellings. Migration from rural to urban areas, which also tends to reduce household size, further adds to this demand.


Stock of Housing Loans 1/

(Percent of GNP)

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: Central Bank of Turkey.1/ Data for 2007 as of April 27.

Growth in Housing Loans

(Year-on-year, percent)

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: Central Bank of Turkey.

Household Sector Disposable Income

(Billions of lira)

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: Central Bank of Turkey.

Household Debt Ratios Across Europe, 2005


Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: Central Bank of Turkey.

Mortgage (Housing) Loans

(End-2003, share of total loans)

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: Central Bank of Turkey.

Turkey: Housing Needs

article image
Source: CBT Financial Stability Report

C. Possible Macroeconomic Implications

Long-term economic development

4. A mortgage market can foster the development of the financial sector and raise economic growth.2 Mortgages not only permit extending larger, longer-term lending but also expand lenders’ funding options and allow a re-allocation of risks through the securitization of mortgage loans. If supported by reforms that promote the domestic demand for long-term debt—the development of private pension funds, for example—mortgage-linked debt instruments can become the basis for deeper capital markets.

5. The creation of a mortgage market may affect the private saving rate. Although financial liberalization generally tends to relax households’ borrowing constraints, lowering the private saving rate, the impact of mortgage reform is less clear. Some empirical studies have indeed found that the deregulation of mortgage markets in the early 1980s contributed to falling saving rates, and saving rates are often higher in OECD countries with less-developed mortgage markets.3 However, other studies argue that introducing mortgage markets would raise saving rates in countries where the previous absence of mortgage lending made households extremely liquidity constrained, and where housing demand is large due to population growth.4 Under these conditions, the sudden availability of mortgage finance can induce households to save more in order to make a downpayment on a first home purchase.

6. A functioning housing market could also create positive spillovers for growth. Currently, almost 50 percent of Turkey’s housing stock is “informal,” which has negative repercussions on housing conditions and urban planning in fast growing urban settlements (World Bank, 2007). Mortgage finance should help to formalize the housing market and upgrade its quality.5 This could positively contribute to human capital (health, child raising, shelter), promote organized urban growth, reduce earthquake exposure, and increase labor mobility (Joint Center for Housing Studies, 2004).

cyclical effects

7. Mortgage lending, house prices, and economic cycles are closely correlated in many economies. Research for industrialized countries shows household consumption to be significantly influenced by house price developments. Moreover, house prices have become increasingly correlated with mortgage lending activity, as mortgage markets were liberalized.6 Because households can use their housing wealth as a basis for borrowing, changes in house prices may affect consumption not only by changing households’ wealth, but also by raising their capacity to borrow. Empirical evidence largely supports the presence of a wealth effect on consumption (Campbell and Cocco, 2005). A consumption-driven expansion of domestic demand may itself feed back into rising house prices. As a result, in most developed countries house prices and mortgage lending are closely correlated with economic cycles—and at times have been associated with overheating followed by recessions.7

8. How these effects could play out in Turkey depends critically on the potential magnitude of house price increases and the strength with which these would affect households’ behavior.

  • Indications are that the room for further real estate price increases is substantial. There are no readily available house price data in Turkey. However, using real estate prices from a large real estate broker for the region of Ankara from 2000 to 2005, Binay and Salman (2006) conclude that real estate prices have only just recovered to their pre-crisis levels in real terms. Also, local real estate developers typically point to low prime real estate rents in Istanbul compared to other European commercial centers (Goyhder, 2005).

  • The impact a mortgage-induced demand increase may have on house prices will also depend on supply side conditions. A growing mortgage market in Turkey will fuel demand for housing. If supply cannot keep pace, house prices are likely to surge. For example, data from the CEE transition countries show larger mortgage markets to be associated with higher construction activity. Yet, in Latvia, high mortgage lending has coincided with only moderate new construction, and instead seems to have mainly driven up house prices. They more than tripled in only five years, which is high even among the new EU member states. Supply side constraints seem to have played an important role in this, including slow zoning and building authorization, land shortages in main markets and an apparent lack of competition in the developer industry. Such factors could also become relevant in Turkey, where the planning, zoning and building permission system is also considered slow, the land market is complicated by large public ownership, and migration pressures are concentrated on a few metropolitan areas.8

  • Households’ consumption response to housing wealth effects is likely to depend on structural factors in the mortgage and housing market. Research finds that the impact of housing wealth on consumption is higher in countries with (i) a high rate of owner occupancy; (ii) easy access to mortgage finance, and in particular to mortgage products that facilitate housing equity withdrawal (e.g., low downpayment, high loan-to-value ratio, and repayment terms that keep debt service low);9 (iii) low housing transaction costs (which make housing a more liquid assets); and (iv) a predominance of adjustable rate mortgages. How does Turkey fit into these categories?10

  • (i) owner occupancy is reported to be around 72 percent in Turkey, which is relatively high by international standards. In principle, this would suggest potentially strong wealth effects. The use of increased housing wealth for mortgage collateral could be limited by the high share of informality in the existing housing stock. However, as the availability of mortgages provides a new incentive to formalize housing ownership (titles, licenses etc), this may change over time.

  • (ii) Access to mortgage finance. The mortgage law sets the maximum loan-to-value ratio at 75 percent, which is lower than in most of the more advanced countries. Maturities and repayment structures of mortgage products will much depend on macroeconomic developments. However, sub-regulations to the mortgage law will have to determine to what extent banks can offer products that encourage equity withdrawal for consumption purposes (e.g., interest only or zero downpayment products).

  • (iii) Housing transaction costs in Turkey are reportedly high by international standards, due to high taxes and a burdensome fee structure (Dubel, 2006). This makes houses less liquid assets, which theoretically should dampen the consumption response to housing wealth effects.

  • (iv) Relative importance of adjustable vs. fixed rates. Countries with predominately adjustable-rate mortgages (ARMs) have typically experienced higher house price growth and volatility than countries with fixed-rate mortgages (FRMs). Since lenders typically promote the type of mortgage that best serves their balance sheet needs, ARMs are prevalent in countries where funding for mortgages is based on short-term deposits (e.g., Australia, Spain, United Kingdom).11 This is an important finding for Turkey: the introduction of ARMs is a key feature of the new mortgage law and banks are likely to advertise ARMs to match their short-term lira deposits. The future stock of household mortgage debt may thus mainly be in ARMs. While this reduces the lender’s interest exposure, it may imply stronger fluctuations in household consumption and house prices.


Increase in Mortgage Lending and House Prices

(Increases between 1980 and 2003, percent)

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005


Informality in Turkey’s Housing Market

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: IMF, World Economic Outlook.

Share of Owner-Occupied Housing

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: OECD,2004; and Binay and Salman, 2006 (Turkey).

Maximum Loan-to-Value Ratio for Mortgage Loans


Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: OECD, 2004; and Binay and Salman, 2006 (Turkey).

9. while these effects will take time to be fully felt, it is important for policymakers to follow them from the start. For example, based on past data, Binay and Salman (2004) estimate a correlation of private consumption with real estate wealth of 0.2 percent. This correlation may rise, as Turkey’s mortgage market grows. Similar calculations for OECD countries show this correlation coefficient at 0.58 percent on average. It reaches over 0.8 percent in countries where mortgage access is easy, loan-to-value ratios are high, downpayments low, ARMs widespread, and home equity withdrawal products common.


Correlation of Private Consumption with Real House Price Changes

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: OECD, 2004; and Binay and Salman, 2006 (Turkey).

D. Implications for Monetary Policy and Financial Sector Regulation

Monetary policy

10. Higher household mortgage indebtedness, in particular at adjustable rates, can significantly impact monetary policy transmission. Households with high ARM debt become more sensitive to changes in interest rates. Rising interest rates will not only raise their immediate debt service costs, but also reduce their perceived wealth position as higher interest rates put downward pressure on house prices. This increased sensitivity could boost the potency of monetary policy to counter cycles. If FRMs present the larger share in household debt, interest rate policy still has an effect, because households try to refinance their FRM when interest rates fall. The maximum refinancing fee permitted under Turkey’s new mortgage law is 2 percent of the remaining debt under loans. This is still considered to be low and may not deter refinancing in the case of declining interest rates (Debelle, 2004).

11. Also, a housing boom funded by foreign savings would further complicate the difficult question of how to respond to capital inflows. This involves the issue of central bank intervention and sterilization in the face of a large current account deficit and above-target inflation. While the issue is not new in that it applies to capital inflows in general, a foreign financed mortgage boom could amplify existing pressures, adding real estate as a new asset class for foreign investors.

Financial sector regulation and supervision

12. The growth of a mortgage market brings important new challenges for financial regulation and supervision. In the extreme, the above-described effects can take the form of excessive asset price valuations, which fuel unsustainable lending booms based on inflated real estate collateral. Indeed, the liberalization of domestic financial markets, increased competition and the emergence of new financial institutions—without an accompanying strengthening of regulations and supervision—have been common factors behind financial crises in other emerging and industrialized economies (Hilbers et al., 2001).

13. Therefore, the new mortgage law must be supplemented with sound sub-regulations and the supervisory responsibilities must be defined clearly. To ensure that the new law’s principles are effective in practice, further specificity must be provided through sub-regulations (e.g., on the appraisal process and profession, pre-contractual information for consumers, and procedures for refinancing and prepayments). Moreover, the supervisory responsibilities between the Capital Markets Board (CMB) and the BRSA must be made clear. The law establishes that the BRSA will supervise primary lending and is in charge of consolidated supervision, while the CMB takes charge of secondary lending, including the licensing of the new mortgage finance corporations. This shared supervisory responsibility requires close cooperation, although it must always be clear which agency is ultimately responsible in any problem case.

14. Developments in some transition economies exemplify the challenges posed by rapid changes in mortgage markets. In most transition economies, mortgage lending started off with small-size, local-currency bank loans, mainly for housing purposes. However, strong economic performance combined with positive confidence effects of EU accession (including prospects of Euro adoption) and the entry of foreign banks, have given rise to dramatic changes in the mortgage market: wider range of loan purposes, higher loan-to-value ratios, foreign currency mortgages, and new loan distribution channels. While in principle beneficial to consumers, some of these developments have started to raise concerns among regulators. Turkey can learn from these experiences and avoid some undesirable developments (such as, the fast spread of mortgages in foreign currency).

Poland: Mortgage Product Development over 10 years

article image
Source: Dübel, 2006.

15. collection of the relevant data is a prerequisite for effective supervision. To further research and monitor the effects discussed in this chapter, it is crucial to have access to relevant data, in particular house prices. Research for many countries has clearly recognized house prices as a key indicator for demand pressures. Yet, availability of adequate data is also identified as an important area where further efforts are necessary, including in more advanced economies.12 Reported efforts to start collecting Turkish house price data in a systematic way are, therefore, welcome and deserve continued attention and resources.

1. Key Elements of the New Mortgage Law

Improvements in the regulatory infrastructure for the primary market (loan origination).

  • Legal protection of mortgages is strengthened by introducing new registration requirements and accelerating enforcement and foreclosure procedures.

  • Primary market infrastructure is improved by defining the principles of the professional appraisal process.

  • Range of available instruments and options is widened by permitting banks to offer adjustable rate mortgages and to charge prepayment fees for fixed rate loans (up to 2 percent of the remaining debt).

  • Competition is increased by allowing non-bank lenders to enter the market for mortgage loan origination after a phase-in period.

Introduction of secondary market framework (funding and risk management).

  • The law introduces Mortgage Finance Corporations (MFCs), which can provide funding to the primary lenders (loan originators). They may function either as liquidity facilities or as conduits for securitization.

  • The law also creates two types of new capital market instruments: mortgage-covered bonds and mortgage-backed securities.

    • Mortgage-covered bonds allow loan originators to pool their mortgages and fund mortgage lending activity by selling the bonds. The original loans remain on the institutions’ balance sheets.

    • Mortgage-backed securities enable the institution that originates the loan to move the original loans, and the associated risk, off its balance sheet.

Examples of Mortgage Market Liberalization and Mortgage Growth

In the 1980s, a wave of mortgage market liberalization led to a fast expansion of lending. Industrialized countries’ efforts to liberalize financial markets in the 1980s eliminated many of the restrictions that previously limited the scope of mortgage lending (e.g., regulations with respect to the terms and conditions of loans as well as to lenders’ funding capacities). This expanded the scope to use housing wealth as a basis for mortgage lending. At the same time, many countries made successful efforts to reduce inflation from the elevated levels reached in the 1970s, which also brought down long-term interest rates. In this environment, mortgage lending soared, causing house prices to rise.1


Mortgage Loans

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: IMF, World Economic Outlook.

EU accession added further impetus in some countries. Joining the EU in 1986 significantly changed the prospects for future macroeconomic and political stability in Spain. In addition to lower inflation and declining interest rates (in particular after the launch of the EMU), Spain also experienced relatively higher growth in the process of converging with the richer EU members. Mortgage lending soared in the 1990s after being negligible until the early 1980s.2

Many of the transition economies, which became EU member states in 2004 (and 2007), are experiencing mortgage market booms. Most of these countries had introduced mortgage legislation as part of their transition to market economies. As the economies stabilized, for which the EU accession process provided an important anchor, the combination of falling interest rates, households’ rising disposable income, a growing banking sector fueled by foreign capital, and large demand for better housing, drove mortgage lending higher. As in other cases, this was also associated with strong house price increases.3


Residential Mortgage Loans in Transition Economies

(Year-end; percent of GDP)

Citation: IMF Staff Country Reports 2007, 364; 10.5089/9781451838237.002.A005

Source: IMF, World Economic Outlook.
1OECD (2000).2IMF (2006 b).3OECD (2002); World Bank (2006).


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At their lowest, monthly interest rates for a 10-year lira loan came down to about 1 percent.


IMF (April 2004).


Li (2001). The simulations are done for Middle Eastern countries, excluding Turkey.


For example, for lenders to securitize their mortgage loans, the underlying housing collateral must fulfill regulatory license requirements.


Co-movements in property prices and mortgage borrowing were comparatively weak in the 1970s but have become stronger in the 1980s and 1990s (OECD, 2000).


For example, UK, Sweden and Finland experienced severe recessions when house price booms ended in the late 1980s. However, research also shows that real house price movements differ markedly across countries. Furthermore, whether these movements lead, or lag, cycles differs across countries and between cycles. See OECD (2004; 2000).


Housing equity withdrawal is defined as the amount by which the net increment in a household’s mortgage debt exceeds the household’s residential investment.


These structural differences are very significant also in developed markets. As a result, changes in housing wealth strongly affect household consumption in countries like Australia, Canada, the Netherlands, the United Kingdom and the Unites States, but have relatively little impact in France, Germany, Italy and Japan (OECD, 2004).


In contrast, countries with well-developed markets for covered bonds or mortgage-backed securities have a high proportion of FRMs (e.g., the United States, Germany, Denmark). See IMF (2004) and OECD (2004).


For instance, see recommendations by the BIS—Committee on the Global Financial System (2006).

Turkey: Selected Issues
Author: International Monetary Fund