The Turkish lira is back in the spotlight. This year, the lira has lost 40% of its value against the US dollar, 30% of them in November alone.
Although this drop has worried Turkish citizens, it has played into the hands of real estate buyers who are rushing to purchase Turkish real estate at discounted prices.
The rapid devaluation caused rather weak intervention from the central bank, excessive demand for dollars and Turkish protests against the economic policy of President Recep Erdogan. So far, Erdogan has blamed the troubles of the lira on foreigners and their Turkish supporters.
Why is the lira collapsing?
The fall of the lira was triggered by the reduction of the key rate by the central bank of Turkey on November 18. This was the third decrease since September, and another decrease was promised in December.
When the bank lowers the key rate, it becomes cheaper to borrow money, which reduces its value relative to other currencies. This works well when inflation is low and you want to support economic growth: low interest rates make it easier for consumers to get loans, and for businesses to get loans, which allows them to expand and hire employees. Lower rates also boost exports by making goods less expensive and competing with goods from other countries.
Thus, lowering interest rates is good when inflation is low. However, the situation is different in Turkey. In October, inflation in Turkey was 20% per annum, which is four times higher than the target level of 5%. Currently, it is about 15%. When the key rate decreases, inflation inevitably rises. That is why other countries — for example, South Korea, Brazil, Mexico and Hungary — have raised their key interest rates to try to contain inflation.
Why is the key rate in Turkey so low?
In short: Erdogan. The Turkish president has long insisted on keeping interest rates low, believing that this is the best way to beat inflation, support the economy, increase exports and support the workforce.
Despite the doom and gloom of the situation around the currency, Turkey’s economy is growing. In the third quarter, the economy grew by 7.4%. However, although economic growth is good, inflation affects the standard of living of an ordinary Turk: enterprises that depend on imported goods, which are becoming more expensive due to insufficient purchasing power of the lira, shift these costs to consumers.
What does all this mean for the real estate market?
If for Turkish citizens the depreciation of the lira is a cause for concern, then for foreign investors it is simply a blessing.
Cameron Deggin, director of Property Turkey, says business is brisk. “It’s definitely a buyer’s market right now,” Deggin said.
According to him, the number of requests, already high, has increased dramatically. “Basically we get about 70 requests a day and about 3,000 site views. But recently, this figure has increased by about 30%. Buyers are looking for opportunities that the weakening of the lira opens up.”
“Although developers have raised prices to compensate for the rising cost of materials, the depreciation of the lira still means good news for buyers,” Deggin said.
What’s next for the Turkish economy?
This week, Erdogan has been exploring various ways to slow the lira’s decline. Among them was the sale of US dollars, a measure that has not been used for almost a decade. This led to a rise in the lira, but then it sank again. In addition, he changed ministers in an effort to find fresh ideas and new solutions.
However, he is adamant about one thing: there is no sign that he will change his mind about the desire to keep the key rate low.
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