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
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.