Turkish housing crisis persists despite construction surge

December 5, 2023, 10:18 AM

Turkish housing construction Turkey — The February earthquake destroyed an estimated 345,000 buildings. The number of construction permits issed in Turkey is surging

Earthquake destroyed 345,000 buildings
Construction permits up 25% in Q3
Costs of land, labour and materials rising

Activity in the Turkish construction industry is picking up pace, fuelled by the need to rebuild after the February earthquakes — but economic woes mean the road could be long, experts tell AGBI.

Even before the February earthquakes, which killed 50,000 people, injured 100,000 more, and made 3 million homeless overnight, the country of 83 million was in the grip of a housing crisis.

The disaster added fuel to that fire by causing $34 billion worth of damage, destroying an estimated 345,000 buildings and damaging 4 million others.

Now, more building permits are being issued than at any time since the Covid-19 pandemic began, according to data from the Turkish Statistical Institute.

In the third quarter of 2023, the number of permits being issued for buildings rose 24.9 percent year on year and the number dwelling units being approved increased 35 percent.

Serhat Başdoğan, a board member of the Turkish Real Estate Investors’ Association, believes these figures are a “glimmer of hope” in the Turkish housing market.

“The recent surge in housing construction permits, with 196,000 new permits issued in the third quarter of 2023, signals a significant increase in activity,” he says. “This figure, though below the long-term average, is noteworthy.”

More people are working in the sector, too. In Q3 2023, 42,000 more people were working in the Turkish construction industry than in Q2. Today, 6.4 percent of the country’s working-age population works in construction.

However, Başdoğan warns that this increase is not entirely positive. "A detailed analysis shows that a large portion of these permits are for regions affected by earthquakes, indicating a more reactive than proactive stance in the construction sector,” he says.

Just over half – 54 percent – of floor area in the pipeline approved by authorities will be used for residential purposes, with the remaining split between non-residential floor uses and common-use areas.

“The Turkish construction and real estate sector is currently facing a trio of formidable challenges: rising costs of land, labour and materials," says Başdoğan.

"These challenges, combined with the increasing demand for housing and a lag in supply, represent a crucial test for the industry.”

Also hampering the post-earthquake rebuild are price issues. Turkey’s construction cost index for civil engineering has jumped by 74 percent since last year. Material and labour costs grew by 54.15 percent and 115 percent respectively.

Zeynep Dağlar, head of valuation and advisory at CBRE Turkey, says: “According to my research, approximately 350-400,000 units need to be constructed yearly in Turkey to cover the pending demand that has built up since the pandemic. This figure excludes the earthquake effect.”

The country’s ailing economy means it is becoming increasingly hard for ordinary Turks to move on to the property ladder — a problem with knock-on effects for construction.

In the January-October period, house sales decreased 14 percent compared with the same time last year, dropping to 993,835 from 1,159,853. Mortgaged house sales decreased by 58 percent in the same period.

“Due to banks narrowing their credit taps and high-interest policies, the chance of buying a house using a mortgage is almost non-existent. For this reason, housing sales have dropped significantly," says Dağlar.

"The construction industry affected by the pandemic has still not been able to reach its pre-pandemic position.”

Middle-class families, she adds, are particularly struggling to buy homes.

Turkish home sales construction Turkey — Investors's interest in Istanbul properties started to decrease during Covid and was further exacerbated after this year's earthquake

Istanbul lagging

The fortunes of Istanbul’s 16 million inhabitants are diverging from those living in smaller cities, according to Celal Erdoğdu, managing partner at Istanbul Real Estate Valuation & Consulting.

“The fact that Istanbul has been lagging behind Turkey’s average in house price increases for a long time, the decrease in the share of foreign investors in Istanbul house sales, and the lower construction licences proportional to the population compared to other provinces show that investors’ interest in Istanbul has decreased," he says.

Erdoğdu says this decline started in May 2020 with the pandemic: “People turned to cheaper cities, and migration to Eastern and South Eastern provinces increased with the decrease in job opportunities.

“With the February 2023 earthquake, Istanbul again started to lag behind the Turkey average regarding housing investment.”

This has been a boon for construction in some of Turkey's smaller cities. Mardin in the southeast, Ordu on the Black Sea, and Kastamonu also in the north have seen an increase of more than 200 percent compared to last year, says Erdoğdu.

"The rise in new construction permits is due to the increased demand in those cities and the related price increase,” says Erdoğdu.

He says the rising number of permits being issued and housing units being built in Istanbul and other Turkish towns will eventually increase the supply and prices will stabilise as a result.

"But," he adds “unfortunately, the results of these investments take time in the property market.”