Construction: Türkiye

Written by Prof. Ali Türel, EECFA Türkiye

Türkiye’s high inflation (79.6% in July 2022 y-o-y), stemming from the Turkish lira’s continued devaluation and the economic consequences of Russia’s invasion of Ukraine, along with soaring energy prices are impacting construction. There is also a rental housing shortage aggravated by the 3,920 million refugees the country is hosting. To counterbalance the negative trends, in addition to the rent freeze law enacted in June, the Turkish Government has announced a big social housing project starting from mid-September.

Economy and housing market

The economy of Türkiye is facing new problems as the severity of the pandemic is easing. The unparalleled FX volatility since Q4 2021 has led to high inflation. The war between Russia and Ukraine has also contributed to the rise in inflation due to increased energy prices, affecting construction activities as well as the production of certain industrial and agricultural goods.

In June 2022, construction cost rose by 105,73% and residential construction cost by 100,87% yearly. The rates of change in Consumer Price and Domestic Producer Price Indices were by 78,62% and 138,31%, respectively.

Home prices have been growing at higher rates than construction costs. The latest statistics dated May 2022 of the Central Bank of Türkiye reports that the annual growth in the national average of home prices was 145,5%, being 44,63 percentage points above residential construction costs. Such a great difference between home prices and home construction cost may indicate a supply deficit in the housing market due to the high level of housing demand.

Building construction in general, and housing construction in particular, had positives rates of change in 2021; starts grew by about 30%, completions 4%. But occupancy permits issued 627 thousand dwelling units were less than the needed number of housing for 725,7 thousand newly formed households in 2021. In H1 2022, however, housing starts registered an 11% drop, and completions an 8% growth compared with the same 6 months of 2021. The falloff in residential building starts was less, the increase in completions was greater than all buildings’ average. The positive rates of change in completions can be related to big backlogs of buildings under construction fuelled by big rises in home prices.

Building materials

The Index composed by the Association of Construction Material Producers of Türkiye has had a negative trend since September 2021; it fell by 10% from 80,15 in in that month to 72,2 in July 2022 and the yearly rate of change was -9,5%, as shown in the July 2022 publication of the Index.

The Association indicates that because of the decline in demand and orders for their products from national and international markets, together with the appreciated risks and uncertainties about the economic environment, the trend may not be reversed in the short run.

Rental market

The rental property market was hammered most by the shortage of supply and sharp increases in rent prices. As a result, a rent freeze for homes was introduced in June 2022 (in effect until 1 July 2023), limiting rent increases by 25%.

The severity of the crisis in the rental market can also be related to the great number of refugees having accumulated since 2011. As per the UNHCR statistics, in August 2022 Türkiye hosts 3,920 million refugees (3,6 million Syrian and 320,000 from other countries) which may add up to as much as 1 million households. Because most refugees live in rental accommodation in cities, it appears that the additional amount of rental housing couldn’t be delivered in such a short period of time.

Social housing scheme

In mid-September 2022, the Turkish Government is going to launch a large-scale social housing project throughout the country. It will be undertaken by the Housing Development Administration (HDA), which is a central government organization that built about 1.1 million dwelling units during the last 24 years in all of the 81 provinces by developing publicly owned land after being transferred to the HDA. About 86% of homes built by the HDA were sold with mortgage loans of the HDA to moderate-to-lower income households not owning a home. Although the completion of construction will take some time, this project will stimulate demand for construction works and materials.

Construction forecast for Türkiye is available in the latest EECFA Forecast Report up to 2024 which can be purchased on eecfa.com.

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

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

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