[ISTANBUL] At first glance, the world's best-performing housing market bears few of the usual hallmarks of a bubble about to pop.
Reliance on mortgages is low, and Turkish homeowners reliably repay their loans, helped by house prices that rose faster than in any other country last year. The risk, at a time when construction has grown to make up a bigger share of the country's investments than in China, is with the builders rather than the buyers.
The share of Turkey's borrowing represented by developers is higher than at any time in the last decade, and represents almost a fifth of all corporate loans, according to the nation's banking association.
An increasing portion of those debts is going bad, with the industry's portion of non-performing loans nearly doubling in the past five years.
"Mortgages are not the problem," said Ercan Uysal, a banking analyst at Istanbul-based research firm Integras. "Developer leverage is."
To keep sales brisk, builders are helping buyers defray their costs. For instance, at Istanbul's US$1.5 billion Maslak 1453 development, whose name recalls the Ottoman conquest of Constantinople, the developer is offering to secure below-market interest rates and accept a 10 per cent deposit - below the 25 per cent minimum required for a bank mortgage.
As rates on housing loans increase, "companies are taking the hit out of their own profits in order to make life easier for the buyer," said real estate mogul Ali Agaoglu, developer of the Maslak project, whose property portfolio and television presence have invited comparisons in local media to Donald Trump.
"What's important for the sector is sales, so this kind of support is perfectly natural," Mr Agaoglu told Bloomberg last month at an economic forum in the ski town of Uludag.
Turkish home prices doubled over the last five years and jumped 18 per cent in 2015, topping Knight Frank's global house price index. Demand benefited from Middle Eastern investors seeking a haven from turmoil in the region and strong population growth, the real estate consultant said.
Builders, who depend on pre-sales for a portion of their financing, can't afford a perception that those gains might slow, said Toygun Onaran, who analyzes property companies for TEB Yatirim, BNP Paribas SA's Istanbul-based unit.
Developers' prospects depend in part on the US Federal Reserve. Its decision to raise interest rates for the first time in almost a decade in December drove up borrowing costs in Turkey and other developing countries.
Turkish bond yields have since declined on speculation the pace of future Fed increases will be slower than feared.
"Even if the Fed has pushed back judgment day, ultimately that could even make the pain worse when it eventually hits because in the meantime money's continuing to flow into unproductive sectors." said Manik Narain, a foreign-exchange strategist at UBS Group AG in London.
The dangers of a weakening currency are exacerbated for builders, because they account for a disproportionate share of Turkey's foreign-exchange borrowing, Mr Narain said.
That creates a risk when their income is mostly in lira, a currency whose value eroded 20 per cent over the course of last year.
Developers made up a fifth of the companies gaining bankruptcy protection from creditors in the first three months of this year, the most of any industry, Mr Uysal said, citing figures from sirketnews.com, which compiles the data.
That's raised the ire of bankers, who say the current bankruptcy law is open to abuse and makes it too difficult to reclaim debts. In interviews in Uludag, the chief executive officers of lenders TC Ziraat Bankasi AS, Turk Ekonomi Bankasi AS and Denizbank AS all criticized the legislation.
Many flats in branded real estate projects like Maslak 1453 sell through financing organized by construction companies.
"The last thing Turkey needs after a large credit binge is the development of shadow financing," said Mr Narain.
Aziz Torun, the head of the association of Turkish real estate investment trusts, or REITs, said the incentives kicked in because one per cent monthly interest is the psychological level beyond which Turkish consumers become reticent about the cost of a mortgage.
"Some REITs are helping residential buyers with interest rates to keep demand lively," Mr Torun said, whose company, Torunlar GYO, is contributing to cut customer's borrowing costs below that one per cent-a-month level.
The average mortgage rate has risen to almost 15 per cent this year from less than 11 per cent a year ago, and rates have stayed at their highs even as the central bank pushed down the cost of borrowing in the past month.
Some see sales staying healthy because of demographics: The influx of immigrants will keep the market buoyant, while accelerating divorce rates mean "there'll always be demand," said Onder Halisdemir, the CEO of Agaoglu Group.
Yet that view isn't uniform. Home prices surged last year, "and I have difficulty in understanding the fundamentals of this rise," said Ismail Kazanc, the chief financial officer of Torunlar.
"I don't expect a rise like that this year."