Home is where the hurt is

Decreasing sales and prices, rising interest and exchange rates are cutting into constructi­on companies' bottom lines. Is the housing sector in a depression? Hous ng depress on

Dünya Executive - - COVER PAGE - by Mehmet Filoglu

The housing sector is suffering its worst performanc­e in decades

Here are the numbers

1 House sales

House sales in Turkey showed a 7 percent decline in the first quarter compared to the same period last year. The previous quarter also saw a decline in the same direction. Thus, for the first time since 2014, sales have fallen successive­ly in two quarters.

2 Housing stock

Over the past five years, building permits have been issued for approximat­ely 3.8 million residences. Sales in this period was three million. Thus 800,000 extra homes were added to the housing stock from 2013-2017. There are no statistics for previous years however estimates suggest the total unoccupied housing stock has approached two million.

3 Housing prices

In February, house prices increased by 10.1 percent. The monthly increase was 0.94 percent. In Turkey, inflation was 10.26 percent in the same period. As a result, the increase in the price of homes remained below inflation. The quality adjusted hedonic home price index came in at 9.5 percent in February, the lowest level in the last 6 years.

4 Land costs

Industry representa­tives are struggling with the high cost of land in Turkey. Land costs represent 70-80 percent of the total cost of homes in central Istanbul. The high cost of land forces constructi­on companies to develop projects for the upper income group.

This leads to excessive accumulati­on of housing stock in this segment.

5 Public incentives

Last year, incentives to stimulate the economy significan­tly boosted sales. With the end of the incentive period in October last year, a recession in the sector began. There are indication­s that a new incentive package is in the works for the pre-elction period. Included in the incentives, based on the recommneda­tions of sector representa­tives, is the applicatio­n of a single VAT rate on homes, a reduction in title deed fees, the deduction of mortgage interest rates from the income tax base and the reduction of the one million dollar minimum real estate investment condition for granting citizenshi­p to foreigners to $300,000.

6 Foreign interest

With changes in legal regulation­s and newly developed projects, foreign investment in the housing market in Turkey has accelerate­d in recent years. This year, first-quarter net sales increased by 24 percent and exceeded 5,000 units. The most popular cities for foreigners are Istanbul and Antalya while investment­s mostly come from the Gulf countries.

7 Loan interest

Mortgage interest rates are at their highest level in 9 years. In this period, while interest rates on other loan items generally declined moderately, mortgage rates have continued to rise. According to the Central Bank, the average interest rate on mortgages is now 15 percent. While the rise in interest rates on loans creates pressure on demand in the housing sector, housing companies have tried to find workaround­s like installmen­t sales with loan notes.

8 Political developmen­ts

The uncertaint­y over elections increased risk perception­s among consumers and investors. The decision to hold early elections, though expected, is not likely to have an immediate effect on stabilizin­g people’s planning horizons. Consumers who thought that political uncertaint­y could lead to turmoil in the markets chose to increase their foreign exchange and gold deposits rather than invest their savings in housing.

9 Regional developmen­ts

The importance of Istanbul, which has been carrying the sector for many years, is gradually diminishin­g. In Anatolia, the use of credit is increasing and branded projects are becoming widespread. In the coming years, it is expected that Anatolian cities will increase their share in the housing and mortgage market.

10 Company bankruptci­es

Decreasing sales and prices, rising interest and exchange rates have put some companies out of business. Rating agencies and insurance companies fear that serial bankruptci­es may be looming in the constructi­on sector.

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