Treasury borrowing aggravates Turkey’s interest rate woes (Al-Monitor, June 28, 2017)
Summary Ankara’s pressure on banks to lower interest rates has taken a menacing tone, but…
Turkey’s construction sector, the backbone of Ankara’s growth policies for the past decade and half, stands out among the earliest victims of the country’s economic crisis, rapidly contracting and threatening to drag others down with it.
The sector, including realty, accounted for 15.7% of Turkey’s $851.5 billion in gross domestic product (GDP) last year, almost on par with the manufacturing sector, which accounted for 18.5% of GDP. After impressive expansion, sales are now shrinking rapidly for homes and offices, leaving builders with swelling stocks. Housing demand, in particular, has fallen sharply, hit by the slump of the Turkish lira and the ensuing increase in interest rates. Building companies are struggling to decrease stocks and repay bank loans. Despite government incentives, including tax cuts and cheaper loan campaigns, the sector remains in turmoil, and the circle appears to be tightening.
In the first nine months of the year, home sales decreased 2.7% compared to the same period last year. Mortgaged home sales, meanwhile, were down 29.4%, largely the result of the increase in interest rates. The rate on home loans hit 25.2% in September, up from 12.9% in September 2017, before climbing further to 29% in October.
The overstock problem has also strained the government’s Housing Development Administration (TOKI) and its affiliated Emlak Konut, the country’s biggest real estate investment trust. Founded in 1984 to develop land with infrastructure and provide loan support to mass housing builders, TOKI turned to high-profit housing after the Justice and Development Party (AKP) came to power in 2002. Since 2008, it has also focused on the construction of public buildings, including hospitals and schools. As of June, TOKI had 142,000 homes for sale. Since 2003, it has sold about 696,000 of the nearly 838,000 homes it built, but it is now struggling to attract buyers, and the number of its new projects has visibly decreased.
Sales figures in branded projects developed by Emlak Konut also indicate a slow down. Nearly half of Emlak Konut homes, offices and shops remained for sale during the first half of 2018, according to a company activity report released on the Public Disclosure Platform.
Shrinking demand has also led to tangible drops in home prices. As a result, the annual increase in housing prices has fallen well behind the increases in overall consumer and producer prices. As of August, the 12-month increase in housing prices stood at only 3.8% in Istanbul, 8.6% in Ankara and 15.7% in Izmir, according to central bank data. Producer inflation was 32% for the same period, a striking sign of how the increase in housing prices was not even half of the inflation rate.
Hardship in selling or renting finished homes and offices has forced an abrupt halt in new investments. Another major factor is the spike in construction material prices amid the rapid increase in foreign exchange prices and interest rates over the past several months. The construction cost index by the Turkish Statistical Institute indicates that the prices of construction materials soared 44% over the last 12 months, with overall producer inflation reaching 46% in the same period. In 2016 and 2017, the increase in construction material prices stood at 13% and 27%, respectively. The soaring costs have not only discouraged new investments but have also dealt a heavy blow to ongoing projects.
A sharp downturn is seen for infrastructure as well. Public construction investments have rapidly slowed, and the so-called megaprojects, launched as public-private partnerships (PPP), have also fallen into crisis. PPP projects, including airports, highways, bridges and hospital campuses, many of them in and around Istanbul, have been hit by foreign currency losses due to the meltdown of the Turkish lira, which has aggravated the debt burden stemming from the foreign loans acquired. The increasing costs are hard to cope with for those projects as well.
Dozens of construction companies have already thrown in the towel, lining up for bankruptcy protection in commercial courts. The hardest blows, however, are being felt by the sector’s workers, from blue-collar laborers to architects and engineers. Employment figures in the sector are on a downtick. Moreover, the increase in labor coststrails well behind consumer inflation, indicating a meltdown in the real income of construction workers. As of July, the 12-month increase in labor costs stood at 17%, compared to a nearly 20% increase in consumer prices for the same period.
When the AKP come to power in early elections in November 2002, it was handed a rehabilitated economy on a silver platter, while the three outgoing coalition partners were ousted from parliament, paying the penalty for the International Monetary Fund-backed austerity measures that put the economy back on track after a severe crisis in 2001. Drawing on this precious inheritance, the AKP government was able to attract an extraordinary inflow of foreign funds, including in the aftermath of the 2008 global crisis, until 2014. Thanks to those foreign funds, obtained mostly through borrowing, it achieved high rates of economic growth, which relied largely on the domestic market and was heavily driven by construction. The government paid no mind that construction was not generating much-needed foreign exchange, enjoying the political returns of the building frenzy.
Turks were impressed by the grandiose airports, bridges and buildings springing up before their eyes, rewarding the AKP at the ballot boxes. In further electoral gains for the party, the construction boom meant jobs for the most unqualified and neediest breadwinners, while part of the foreign funds flowing into the country became housing loans to make large numbers of Turks homeowners.
Another reason to opt for construction-centered growth was to create the AKP’s own bourgeois, with the building spree proceeding along with nepotistic construction permits and public land allocations by local administrations and the central government. As such, the construction sector provided the funds to build a party state through the control of crony business people of varying caliber.
This wheel, which relied on foreign funds to continue spinning, began to slow as money became more expensive after 2014 before hitting a downturn and then crisis. Due to its links with many industrial subsectors and service sectors, among them financing, real estate marketing and advertising, the crisis-hit construction sector has begun to drag the entire economy down.
A fresh takeoff can be achieved only with the revival of domestic demand, which, in turn, requires reducing inflation to single digits, getting loan interests to reasonable rates, restoring foreign investor confidence in Turkey and the flow of external funds and dispelling the general fog of economic uncertainty. In short, it all depends on seeing a light at the end of the tunnel, which is likely to take several seasons. Before anything else, however, the AKP government needs a clear roadmap to begin climbing out of the hole. Some may claim the worst is now behind, but the truth is, Turkey has not hit bottom in the current crisis.