Building Construction in Turkey during the Pandemic based on H1 statistics for 3 years up to 2021

The Covid-19 pandemic that began in March 2020 has caused significant disruption in the Turkish economy and building construction. The exchange rate crisis in H2 2018 resulted in big rises of construction costs and sharp drops in building construction in 2019. In H1 2020 the economy and the construction sector were recovering from that crisis when the pandemic struck.

Written by Prof. Ali TUREL, EECFA Turkey

Karaköy, İstanbul, Turkey. Photo by Kadir Celep. Source: https://unsplash.com/

Building starts in the first six months of 2020 were about 41% up from the same six months of 2019. The government’s subsidy policy to provide mortgage loans under market exchange rates by the three state-owned banks was in effect from the beginning of June to the end of August 2020, greatly stimulating demand for housing and housing transactions. House building starts appear to have gained momentum from the subsidy policy, and building construction permits, dominated by residential buildings, grew by 45,3% in H1 2021. Nonetheless, there is a large backlog of buildings under construction in almost every use.  

The hike in the starts of residential buildings is also reflected in their growing share in total building construction permits: 63% in 2019, 76,7% in 2020 and 79,3% in 2021. The share in total starts of commercial and industrial buildings (hotels, restaurants, wholesale and retail buildings, warehousing and industrial buildings) has had a downtrend: 15,1% in 2019, 14,8% in 2020 and 12,5% in 2021, although their starts rose by 42,6% in 2020 and by 23,5% in 2021. The shrinking share of their starts is due to the bigger growth rates in residential buildings starts. Public buildings (transport buildings, schools, research buildings and hospitals) had a 21,9% share in 2019 but dropped to 8,5% in 2020 and to 8% in 2021. Their high share in 2019 might be explained by the huge decline in private sector investments in that year.

Construction forecast for Turkey is available in the latest EECFA Forecast Report Turkey up to 2023 which can be purchased on eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Building occupancy permits, on the other hand, had a different trend from that of construction permits. Total floor areas of completed buildings expanded by 2,8% in 2019, while construction permits dwindled by 60,1%. 2020 saw a 32,2% shrinkage in occupancy permits, followed by a 3,3% growth in 2021. And it is a known fact that builders cannot react to market signals during economic crises in a short period of time because of the heavy sunk cost of buildings under construction, particularly of those close to completion.     

Wonder why completion is above permit on the chart above? Check this visualization and choose Turkey in the <Country> dropdown

Builders of residential, commercial and publicly used buildings had almost the same reaction to the crisis caused by the pandemic: the share of these buildings did not alter much between 2019 and 2021. The only notable difference was a slight drop in the share of residential buildings from 79,5% in 2020 to 77,4% in 2021, and a 2% rise in the share of commercial and industrial buildings from 12,6% in 2020 to 14,6% in 2021.

The total floor area of residential buildings and the number of dwelling units completed in H1 2020 and H1 2021 were almost the same, while a 19% growth occurred in the total floor areas of completed commercial and industrial buildings. Housebuilders appear to be cautious in completing construction because of the shrinking demand under the conditions of high mortgage interest rates. Decreased real incomes due to big falls in the value of Turkish Lira against foreign currencies under the effects of the pandemic also contributes to the fall in demand. Mortgaged sales in housing transactions was 18,9% of total sales until the end of July, 2021. First sales have been decreasing during the pandemic from their consistently stable level of 46% to 30% in the same 7 months of 2021.

Housebuilders are also squeezed between the upsurge in building construction cost (42,48% yearly until the end June 2021) and the relatively less rise in housing prices (33% for new housing and 29,2% for all housing) within the same period. The great backlog of residential buildings under construction causes builders an additional cost of delaying completions. Thus, expectations for another subsidised mortgage scheme from the government are frequently raised in the media.

Turkey: Despite Covid-19 housing transactions historically peaking

In the midst of the pandemic, Turkey’s housing transactions are booming. Here is the answer why.

Written by Prof. Ali TUREL, EECFA Turkey

The pandemic in Turkey

Covid-19 has caused various problems in the Turkish economy, like in many other countries. The Government had to introduce a series of precautionary measures from mid-March onwards. Schools, universities, and many commercial establishments were closed. Factories and most construction sites had to stop work or reduce the number of workers. Many people lost their jobs that had to be compensated by the Government through allocating large sums of money. Many establishments got into financial difficulty, and rescue plans had to be put into effect in the forms of providing loans and deferring tax and other payments to public institutions. Demand for many goods and services, including real estate, shrank under the Covid-19 pressures.

Industrial production slumped by 6.8% in March, 30.4% in April and 19.5% in May 2020 from the same months of 2019. Some recovery occurred only in June by a 17.6% rise from the previous month and a 0.1% growth from the same month of 2019. Building construction was also hit by Covid-19, as at the end of Q1, building construction permits in floor areas total were 11.4%, occupancy permits 41.1% down from Q1 2019. The number of completed dwelling units was 152 thousand with a 39.5% drop against Q1 2019.

Building construction industry also appears to enter the recovery process in Q2 with a 40.8% growth in the first 6 months of 2020 from the same 6 months of 2019. Completions, however, registered a 32.5% falloff in January-June 2020 compared to the same period in 2019, most likely because of the Covid-19 effects, although there are big backlogs of construction in almost every segment. The completed number of dwelling units with 269 thousand was about 70% of the 6-monthly rise in the number of households in Turkey.

Stimulus measure

In a bid to stimulate housing transactions, the Government introduced a measure in June 2020, according to which the loan-to-value ratio in residential mortgage loans was increased to 90%. The three state-owned banks were to offer mortgage loans under market interest rates and with a longer repayment period: 0.64%/month for new housing, 0.74%/month for used housing, both with a 15-year repayment period when the annual rate of increase in the Consumer Price Index was 12.62% in June 2020.

The stimulus measure greatly influenced the national housing market. The number of dwelling units sold in March-April 2020 came down to 42,8 thousand and 50,9 thousand, respectively. After the announcement, 190 thousand dwelling units were sold in June and 229,4 thousand in July, implying 209.7% and 124.3% rises from the same months of 2019, respectively. The number of transactions in July was the monthly historical peak, while in June the second monthly historical peak in Turkey.

In June and July 2020 together, 419.369 dwelling units were sold, 232.222 of which (55.4%) on mortgage loans. It is possible that not all applicants were able to use these credits. The ratio of mortgage financed housing to total housing sold was 12.5% in the same two months of 2019. Equity financing was still important with a 44.6% share (187.144 dwelling units) in June and July this year. It appears that people consider investing on housing as a hedge against inflation when all commercial banks offer negative real interest for deposit accounts. 

It has been a much-discussed issue in the media whether offering mortgage loans by state-owned banks under market interest rates would contribute to the clearance of the unsold newly built housing stock. The total number of first sales in June and July 2020 together was 126.569, 30.2% of total sales. The relatively higher price of newly built housing than that of the existing housing stock could be a factor keeping first sales at a 30% level. A media outlet suggests that about 24% clearance of the stock occurred by first sales in June and July this year.

The policy of offering mortgage loans under market interest rates contributed to the big revival of housing demand that had greatly decreased due to Covid-19. Since an interest rate subsidy at that level would unlikely continue for a long time, it will be interesting to see how the housing market will return to its usual course in the following months.

Construction forecast for Turkey is available in the latest EECFA Forecast Report Turkey which can be purchased on eecfa.com

Turkish Construction Sector Seeking Ways to Reverse the Slump

Written by Prof. Dr. Ali TUREL, EECFA Turkey

Turkish construction is in crisis in more fronts. High interest rates due to high inflation cloud the situation of construction players. As well as this, high negative real housing price changes with real construction costs being in positive numbers are creating adverse market conditions for housebuilders. Construction companies active in civil engineering have decreasing workloads due to the October 2018 presidential decree not to tender new projects except for priority ones and due to the reduced available central and local budgets for projects this year. The construction sector in Turkey is seeking ways to come out of this crunch.

The Bosphorus Strait, Istanbul, Turkey – Source: Buildecon

 

How it all started

The colossal devaluation of the Turkish Lira, having started in November 2016, shook Turkey’s construction industry in August 2018. Even though construction costs and interest rates increased against the backdrop of rising exchange rates in 2017, there were exceptional historical peaks in construction and occupancy permits that year. The crisis hit in 2018 with construction permits in floor areas being almost half of the permits of 2017. Occupancy permits went up by 5% in floor areas though, due to the large backlogs of construction in almost every sector. Housing sales also climbed 5% and amounted to 1,409 million by end 2018.

Trends similar to 2018 in building construction and occupancy permits in floor areas continued in the first quarter of 2019 with a 37.7% shrinkage in construction permits and a 29.4% rise in occupancy permits. Annual rate of change in the Building Construction Cost Index decreased from 28.11% in January 2019 to 25.45% in May 2019. Since rates of change in Consumer Price Index were 20.35% and 18.71%, respectively, real rises in building construction cost in the same two months were a respective 6.4% and 5.7%.

Civil engineering projects have been battered by the presidential decree issued in October 2018 requiring all ministries not to tender new projects except for priority ones, on the one hand, and by the lower allocated budget for projects to central and local governments in 2019 than in the previous year, on the other. TUIK, the Turkish Statistical Institute, calculated a 10.9% drop in construction sector in the Gross Domestic Product (GDP) in the Chain Linked Volume Index in the first quarter of 2019 against the same period of 2018. 

Feeling the pinch

Construction industry in Turkey is much concerned with the changes in housing prices and sales since about three quarters of building permits in Turkey are for house building. National average of the annual change in the Housing Price Index accounted for 3.60% in January 2019 and 1.57% in May 2019, implying that real annual changes in housing prices in these months were -13,9% and -14,4%, respectively. High negative real housing price changes when real construction costs are in positive numbers are unfavourable market conditions for housebuilders. Furthermore, decreasing housing sales, by 21.7% in the first 6 months of 2019 and 48.6% in June 2019 compared to the same time periods of 2018, create additional strains in the housing market.

Continue reading Turkish Construction Sector Seeking Ways to Reverse the Slump

Turkey forecast in hindsight

Written by Janos Gaspar, EECFA’s Head of Research

Back in early July, a month before the currency depreciation entered into the free fall phase in Turkey, we wrote a post about the European Commission’s forecast. This is a regular task for us, since we use these forecasts for assessing the expected macro environment in some of our countries. The post was about comparing the most recent GDP forecast with the previous ones and comparing the construction investment (precisely Gross fixed capital formation) outlooks where available.

It was so surprising to see the Commission’s upward revision of construction investment forecast in Turkey (for 2018-2019), that I have entered into a mail exchange with those behind the figures. I thought this was a mistake, but they have assured me that everything is ok with their figures.

For this reason, one more paragraph was added to that post emphasizing that our view on Turkey is significantly different from that of the Commission and that we, EECFA, have revised our forecast downward.

This is the EECFA forecast I was referring to, issued in at the beginning of Summer 2018:

This interactive presentation of our latest forecast is available on our website: http://eecfa.com/

Turkey in bigger size:

Surely, we did not foresee that the events would unfold in such a dramatic fashion; our scenario in many previous forecast rounds was the soft-lending, instead.

Since Summer 2016, which was the first time we provided forecast for 2018, we have had five forecast rounds in EECFA, two per years, plus the most recent one in 2018. In these 5 forecast rounds, our forecast for 2018 varied in a relatively small band, from -1.7% to +2.8%. And the same figures for 2019 (in our latest 3 issuances) were between 1% and -0.8%.

And here we are now, construction investment was up by 8.4% (as published by the Turkish Statistical Institute on 10 September 2018) in the first half of the year. In the good half.

Considering the massive unsold dwelling stock [link in Turkish] and the wide-ranging consequences of the currency downfall already materialized in abandoned/suspended private and public projects, very cautious investors and reconsidered public investment plans, my gut feeling is that our forecast is very much valid.

In case you would like to see our assessments on segment level, EECFA’s forecast for Turkey is available in the EECFA Forecast Report Turkey released on 18 June 2018 together with the other 7 EECFA Forecast Reports.
Sample report: eecfa.com / Discount options and orders: eszter.falucskai@eecfa.com.

Housing Production and Housing Price Relationship in Turkey

This paper is to elaborate on the paradoxical situation Turkey is facing: while building construction cost has risen by 22.8 per cent in nominal, 9.8 per cent in real prices, real housing prices have decreased by up to 7 percent.

Written by Prof. Dr. Ali Türel, Çankaya University, Department of City and Regional Planning, Ankara, Turkey

Residential project EX-115 (Golden Horn Sea View Apartments) under construction in Eyüp, Istanbul, Turkey. Source: http://www.extraproperty.com

In terms of total floor area, Turkey is the leading producer of housing in Europe. Annual starts are around 1 million dwelling units with about 150 million m2 of total gross floor areas, and completions are 750 thousand on average having between 110-120 million m2 of gross floor area. The number of newly formed households in recent years has been between 500 and 550 thousand, and when renewal of risky housing against natural disasters is added, annual housing need can be estimated as 650 to 700 thousand dwelling units. Housing starts between 2010 and 2016 were about twice, and housing completions about 50 per cent greater than the number of newly formed households. Syrian refugees may also have created additional housing demand, by as much as 500 thousand dwelling units since the beginning of the war in Syria.

High levels of housing production occur without much state intervention to the housing market, as most of the conventional housing policies of the welfare state have not been introduced in Turkey. The supply side is favoured more than demand side in state policies, as evidenced by incentives recently provided to builders. Some additional construction rights beyond that determined by Floor Area Ratio (FAR) for each parcel were granted to builders by a By-law in 2013. Such additions, most of which can be made at the basement of buildings, were limited by 30 per cent of FAR in 2017 due to reactions of professional organizations. Another incentive of the 2013 By-law is reducing rear garden distance that enables builders to produce housing on parcels that had insufficient depth according to the former By-law. Otherwise, housing markets operate under a highly competitive environment without much state intervention. Primary support to moderate-to-lower income people in housing acquisition is producing housing on publicly owned land by the Housing Development Administration (HDA), a Department attached to the Prime Ministry selling at affordable conditions. Continue reading Housing Production and Housing Price Relationship in Turkey