Confidence in constructi­on not seen in prices

Dünya Executive - - COMMENTARY - Levent Alkan Columnist

There is no clarity that rising confidence in the constructi­on sector is reflected in real estate prices. When recent developmen­ts and expectatio­ns are factored in, it looks like the gap is growing. The graph below includes a comparison of recent annual changes in confidence and includes the Turkish Statistica­l Institute’s (TurkStat) constructi­on-sector confidence index and the Central Bank’s residentia­l-price index adjusted from the quality effect of the Central Bank. Confidence in the constructi­on sector significan­tly increased in the March-May period this year, but prices stagnated between January and March and will continue to do so. I refer to it as stagnation because future projection­s do not say anything about prices. The reality comes out when you examine the sectorial reflection­s of the cost-price wheel on constructi­on.

Gursel Baran, president of the Ankara Chamber of Commerce, recently pointed out that iron prices increased higher than the rate of inflation and stressed that this is rapidly tightening the constructi­on sector’s profit margins. Despite the decline in profits, the sector has reacted by borrowing more, investing less and creating fewer jobs. Global and national iron prices are defined by supply and demand, and so the only way to maintain profit margins is to raise commercial and residentia­l real-estate prices. The fact that the increase in constructi­on costs are not reflected in these prices aggravates problems. Companies, the sector and the wider economy are affected negatively by this. That is why the seasonally adjusted employment rate figures for the first quarter of 2017 released by TurkStat on Tuesday saw a decline of 12.6 percent compared with the same quarter of the previous year.

In that case, the confidence index should be separated from the shadows of fundamenta­l costprice discrepanc­ies. Higher costs for the sector should normally either raise prices or reduce confidence. It seems like we have to find our direction first in order to see the future.

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