New regulation around lending has caused a ripple in Turkey's domestic property market, especially among young, property-hungry Turks.
This week, the Turkish parliament approved measures to regulate the interest-free funding market for housing.
Despite brisk housing sales and a boom in construction, since interest rates were hiked up to tackle inflation in September, domestic borrowers have dropped out of the market. In January, mortgages covered just 15% of all housing purchases, a stark contrast to the 57% in July 2020.
However, new rules governing the interest-free funding market have paved the way for a domestic boom, in a system that has already attracted 300,000 Turkish buyers wanting to avoid the eye-watering interest rates, which sits at 17%.
Read more: The latest Turkish property and finance newsThe "savings financial system" is a savings account based on Islamic financing principles, which restrict the sue of interest rates. The system is co-operative, with customers signing up for payments for a designated number of years to pay off their purchase, plus an extra cost of somewhere between 7 and 10% that is technically not interest.
Halfway through their payment term, they receive their target amount, which will allow them to buy a property.
Property Turkey director Cameron Deggin said the move would breathe new life into Turkey's domestic housing market.
"This could see the buyers that dropped away thanks to last year's interest hike return," he said.
Turkey's youthful population means there's a huge appetite for property among the burgeoning middle class.
"Turkey's youth are ambitious and better educated than their parents, and they are vying to get on the housing ladder. This will open up a new way for them to do that."
However, they would provide competition to overseas investors, he warned.
"Domestic buyers make up the lion's share of the market and this will no doubt help prices push upwards. Foreign investors will need to act quickly to get ahead of the pack."
The rise of Islamic finance in Turkey
The system has long been a part of the Turkish financial landscape. However, it was largely unregulated, leaving participants open to risk. Now state sanctioned, the system will become a legitimate and safe route to home ownership for Turks.
The loans are offered by private companies, so they're not government guaranteed. Companies must have a minimum capital of $13 million, and have bank regulator approval. They would also be liable for legal action if they unreasonably withheld funds.
For Turkish President Tayyip Erdogan, who has long favoured low interest rates, the system will allow him to introduce more Islamic financing mechanisms.
In 2020, Erdogan said that since he cam to power in 2002, the share of Islamic financial institutions had grown to make up more than 6% of the finance sector in Turkey. The new regulations are expected to boost this figure to 20% in the next four years.
FuzulEv is one such institution. Its chair, Eyup Akbal, said the new regulations were a positive, boosting trust in the system.
"The system absolutely needed to be regulated.”
This lack of regulation meant is was difficult to pinpoint how many people had successfully used the system. However, it was thought about 300,000 people had utilised it so far, with finances of $8bn.
“With the trust issue being lifted, the system could easily grow two-, three-fold within four to five years,” Akbal said.
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