The Shadow of Sanctions in Istanbul's Housing Market
Istanbul residents are experiencing a cost of living crisis. Prices of food, clothing, and other essentials have spiked. Property prices have also surged and Istanbulites are spending a growing share of their income on housing. The high prices are primarily due to President Erdoğan’s heterodox belief that lowering interest rates can lower inflation, a so-called “low interest rate, low inflation theory.”
But many in Istanbul blame the higher prices on foreign property investors, who they believe are crowding out locals in the housing market. This resentment played an important role in the Turkish presidential election earlier this year. The leading opposition candidate, Kemal Kılıçdaroğlu, campaigned on banning the sale of homes to foreigners for at least five years. While the public anger is real, the actual impact of foreign investment on housing prices is not as concrete.
In recent years, the Turkish government has courted foreign investors, seeking an influx of foreign currency to replenish reserves dangerously depleted during the Turkish central bank’s defense of the lira. To help shore up its own economy, the government has enacted policies to make Türkiye a more attractive destination for foreign investment and residence. The outreach to foreign investors has been timely—Russian and Iranian investors have been eager to protect their assets from waves of Western sanctions.
Russian and Iranian investment in Türkiye rose markedly after the imposition of sanctions. When the US reimposed sanctions on Iran in 2018, the number of Iranians starting businesses in Türkiye jumped. Russian investment followed a similar pattern. When Russia annexed Crimea in 2014, the sanctions levied by the US and the EU coincided with a rise in the number of Russians registering Turkish companies. The largest spike—in the past two years—followed Russia’s invasion of Ukraine.
Property investments follow a straightforward pattern—when the US imposes sanctions, capital flees to Türkiye. In 2022, Russians purchased just under 15,000 Turkish residential properties, while Iranians purchased just over 9,000.
For Russians and Iranians, sanctions and growing fear of instability were push factors. Meanwhile, the Turkish government’s deliberate courting of the fleeing capital pulled investors to Istanbul, Antalya, and Ankara. The physical proximity of Türkiye to Russia and Iran make its cities attractive destinations. More importantly, the Turkish government is under no threat of being sanctioned and Turkish banks continue to be connected to SWIFT and other international banking systems.
While Russian and Iranian companies have established operations in Türkiye, the country is also a destination for individuals seeking to avoid economic isolation and instability in their home countries. Türkiye advertises citizenship to foreigners if they invest over four hundred thousand dollars in Turkish property. For wealthier Russians and Iranians, this offers a pathway to a new passport. The only condition for gaining Turkish citizenship is to maintain the requisite investment for at least three years and to confirm the investment with the land registry.
But acquiring Turkish citizenship does not appear to be the main goal of Russian and Iranian investors. The passport policy implemented five years ago has not led to a significant rise in foreign investors receiving Turkish citizenships. Of the tens of thousands that have bought Turkish property, less than five percent gained Turkish citizenship. While Iranians have made up a large percentage of those who receive investment-based passports, more Iranians bought property in August 2018 more than those who received a passport that year.
The fact that passports make such a small proportion of total foreign buyers—particularly those from sanctioned countries—raises additional questions. It is unclear whether those who have qualified for citizenship based on their investment of at least $400,000, fail to do so because of a lack of knowledge, indifference, or the bureaucratic slog. But clearly, Russian and Iranian buyers are more interested in acquiring an asset in a safe market than they are in becoming Turkish citizens.
Foreign purchases of residential properties have spiked in recent years, particularly in Istanbul, but also in other major cities of Türkiye, such as Antalya and Ankara. In Istanbul, Russians buyers have concentrated in Beylikdüzü, Kadıköy, Bağcılar, and Sarıyer districts. Iranians have focused on Esenyurt, Kağıthane, Sarıyer, Kartal, and Maltepe.
The market share of foreign buyers in Istanbul’s residential property market has nearly tripled in just five years, rising from 3.43 percent in 2017 to 9.61 percent in 2022. But these purchases remain a small share of Türkiye’s overall residential market. In October, purchases of Istanbul property accounted for less than 15 percent of all residential property sales in Türkiye, according to data from the Turkish Statistical Institute.
While foreign buyers are playing a bigger role in the Istanbul property market, there is no clear link between the rise in the proportion of foreign buyers and higher house prices. While yachts and luxury developments attest that there are rich Russians and Iranians in Istanbul, the volume of home purchases point towards a middle class involvement in the market. This could pit middle class Russian and Iranian buyers against members of the Turkish middle class, but foreigners and Turks have very different paths to purchasing homes in Istanbul.
The Turkish mortgage market is still developing and approval rates remain low. Buyers are expected to make a downpayment of nearly 80 percent, and the mortgage interest rate remains around 20 percent. Last year, only about half of all homes bought in Türkiye were purchased with a mortgage. Turkish lenders do not offer mortgages to foreigners, which means outside investors to make their property investments in cash.
Another difference is the commission that the brokerage receives for selling a given property. While the brokerage receives a commission from both foreign and domestic buyers, the currency of the commission depends on the buyer. Real estate brokers prefer to be paid their commission in stable euros or dollars, meaning that foreign buyers have a comparative advantage over Turkish buyers.
These advantages may explain why the rise in foreign property investment has not more clearly contributed to higher prices. Foreign buyers do not need to pay a premium on market prices in order to make property investments. By offering cash payments and attractive commissions, they may be able to secure a purchase agreement with a lower offer than a Turkish buyer would need to make. While sales to Russian and Iranian buyers have boomed in key neighbourhoods, there is no clear link between these purchases and price increases at the district level, according to data from Endeksa, a Turkish real estate analytics company.
Even if Russian and Iranian investment is not a major contributor to the cost of living crisis, it has cast a shadow on the housing market by shaping public perception. Young Turkish professionals who saved for years in the hopes of buying a home are now seeing their savings eaten away by inflation. Both for aspiring homeowners and renters, the doubling of housing costs has required cuts to other kinds of spending, adding to a perception of diminished standards of living. The response of the government has been to raise minimum wages and increase salaries for civil servants, but support for wages does not mitigate the underlying housing shortage. The Turkish government has also taken steps to lower housing demand, aiming these policies at poor refugees, mainly Syrians, by limiting their work visas and encouraging them to move onwards to Europe.
Most studies on sanctions impacts focus on the senders and the targets. The impacts of sanctions on political and economic circumstances in third countries are largely overlooked. In the case of Türkiye, capital flight from both wealthy and middle class Russians and Iranians has created new dynamics in the housing market. Understanding this capital flight is important for understanding the effectiveness of financial sanctions. Countries like Türkiye can modify their policies to accommodate this capital flight, potentially undermining the goals of those governments imposing sanctions. But these policies can have unintended consequences, like the shadow of sanctions cast on Istanbul’s housing market.
Photo: Canva
