Turkey: Despite Covid-19 housing transactions historically peaking

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

Figures on the pandemic impact on Hungarian construction

Press Release on EBI Construction Activity Report Q2 2020 – Hungary

When assessing the first quarter of 2020, analysts of EBI Construction Activity Report Q1 2020 already highlighted the impact of the pandemic on the Hungarian construction industry. Back then, they did it with the help of a forecast based on limited available data, but since then actual data have been released and the impact of the pandemic on the sector can be assessed in detail.

Prepared by Buildecon, Eltinga (creation of indicators and development of algorithms for aggregation) and iBuild (project research and project database), EBI Construction Activity Report examines the domestic construction industry on a quarterly basis, including the volume of newly started construction works, and the value of projects completed in a given quarter by aggregate and by subsector as well. Owing to the pandemic, the analysts of EBI decided to follow the changes affecting the construction industry even more closely and run a monthly update of the EBI visualizations for Start, Completion and the resulting Output for each segment. Full publications can be purchased at ebi@ibuild.info.

In Hungary, the pandemic imposed major restrictions from mid-March on, which only slightly affected construction works starting or getting completed in Q1 2020. However, April and May were marked by severe measures. Figures for the second quarter of the year show that even though the pandemic had had an impact on the sector, there was no drastic fall. It is certain that construction projects did not start at such a low value in Hungary since the last quarter of 2016, and there was a big slump against the beginning of 2020, but compared to the figures of the last and first quarters of 2019, the difference is not so much. It is therefore worth taking a closer look at exactly which segments saw a downturn, as some of the drop may have been caused by other market processes in addition to the pandemic.

While in Q2 2020 construction works started in the construction industry on a total value of HUF 418 billion, in Q1 2020 this figure was HUF 606 billion. Thus, a strong start to the year (an increase over the end of last year) was followed by a 30% decrease. Yet, the renovation works of M3 metro line and the next phase of the Samsung project in Göd started in Q1, contributing with a significant amount to the high Activity Start Indicator of EBI Construction Activity Report Q1 2020. Overall, the first half of the year has not yet seen a major decline in the value of construction works that started in the construction industry, although it is true that it has now hit its lowest level since 2016.

In H1 2020 a major share (45%) of started construction works were concentrated in the Central Hungary region. This was mainly thanks to the higher investment numbers in Q1, so in Q2 the region had a similar share to the previous years. The rest of the country also had a very similar share of started new construction works to previous years.