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. However, HDA’s share in housing starts and completions has remained 6-9 per cent, although the actual need is much greater. Private sector has been dominating housing production with a 92.2 per cent share in 2016. Building cooperatives, having produced about 2,5 million owner occupied housing since 1934, had an only 1.3 per cent share in 2016.

Housing sales have also been high, in line with producing housing in great numbers; about 1,341 million dwelling units were sold in 2016 and 1,409 million in 2017. New housing was 47 per cent and mortgaged sales were 33 per cent of total sales during these two years. The large share of housing transactions without mortgage credits may indicate the importance of investment aspect of housing demand.

Housing construction cost had been increasing at the levels of the inflation rate until the fourth quarter of 2016, in spite of the large amount of building construction. However, this trend changed, as massive rises in building construction costs occurred in 2017 together with building materials prices that have risen about twice the rate of inflation and 2 percentage points above the rate of increase in building construction cost. Such a sharp increase in building material cost can be attributed to the about 30 per cent rise in the value of foreign currencies against the Turkish Lira since the fourth quarter of 2016.

The national average of the housing price index, produced and published by the Central Bank of Turkey, increased by an about 50 per cent higher rate than inflation rate until the end of 2015. Istanbul posted the highest price rises before 2016, followed by Izmir and some provinces in western regions. Real housing prices have been decreasing since the beginning of 2016, and the real annual rate of increase in May 2017 was negative with 0.68 percentage point. Among the three largest cities, negative real rates of increase were higher in Ankara and Istanbul than the national average with about 2.5 percentage points. Izmir had positive real rate of change with about 5 percentage points.

Housing construction costs and housing prices had reverse trends in 2017; the national average of the former increased by 22.8 per cent between the fourth quarters of 2016 and 2017, the hedonic index of the latter rose by 10.07 per cent and general housing price index by 11.33 per cent when the annual change of the Consumer Price Index in November 2017 was 12.98 per cent and of the Domestic Producer Price Index 17.30 per cent. Rises in the General Housing Price index values within the same period of time were 5.87 per cent for Istanbul, 7.16 per cent for Ankara and 19.51 per cent for Izmir.

Real falls in housing prices can be related to the amount of housing production both in Turkey and in the three largest cities of Turkey. In seven years between 2010 and 2016, annual averages of housing starts per 1000 population were 11,3 dwelling units in Turkey, 12,6 dwelling units in Istanbul, 15,1 dwelling units in Ankara and 10,1 dwelling units in Izmir.

Real housing price increase is the highest in Izmir where housing is in short supply. It is mainly related to the shortage of land for building construction due to topographic factors surrounding the shore line. There is also demand for housing for summer holidays in settlements of this province along the sea shore. It is not unexpected that Ankara had the greatest amount of housing supply and the biggest fall in real housing prices. On the other hand, it is surprising to have 7.11 per cent negative real price change in Istanbul since its population increase is still high. It may be related to the great amount of supplied housing, to the falling housing price bubbles that occurred there a few years ago with 10-18 per cent rises in real annual housing prices, and also to the negative effects of traffic congestion in its greatly sprawled urban area. On national level, housing price falls can be related to the oversupply of housing as well as to the possible effects of some macroeconomic factors that are not discussed in this paper.

It can be concluded that demand, supply and price relationships appear to be in effect in the Turkish housing markets. Falling housing prices when building construction cost is rising may not be considered as a surprising outcome following a long period of high levels of supply.

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