The pandemic of recent years, the increase in the dollar exchange rate and the increase in construction costs have caused fluctuations in the real estate sector and, of course, led to a sharp increase in real estate prices.
Especially during the period of long closures during the pandemic, there were great economic difficulties that led to price increases. Increases in all sectors have increased the cost price of many products, and this situation has caused noticeable increases in the construction sector. Due to the increases in the construction cost index and the dollar exchange rate, builders are also reflecting the price increase in property sales.
In this article we have prepared as www.pinaryucel.com for our potential clients who are waiting for the market to settle down and real estate prices to fall, you can find answers to the questions you are curious about.
CONTENTS
1. WHY DO REAL ESTATE PRICES INCREASE?
2. WHAT ARE THE ECONOMIC FACTORS THAT INFLUENCE HOME PRICES?
1. WHY DO REAL ESTATE PRICES INCREASE?
As in any sector, real estate prices are determined by the balance of supply and demand. Real estate prices rise spontaneously due to high demand in the market. As demand increases, developers will want to make more profit. In this case, as prices rise, supply will begin to increase. However, rising prices will reduce demand. As demand decreases while supply increases, home prices will fall.
For many years, low interest rate policy has been implemented around the world to keep the economy alive. With the low interest rate policy, central banks apply negative interest to the accounts of banks within their own structure. In other words, banks cannot earn interest income on the excess cash they deposit with the central bank and are forced to pay the central bank a negative interest rate. Therefore, banks are forced to use their excess cash as loans instead of depositing it with the central bank.
As a result of this situation, banks begin to lend to the market at low interest rates, which leads to an increase in the wealth of individuals. For example, sales in the real estate sector increased during the pandemic due to low-interest housing loans. People took advantage of the low interest rates and started buying real estate. In this case, as the assets of individuals increased, their incomes started to increase, so the rich got richer. In this case, as a result of the increased demand for real estate sales, prices in the real estate market increased.
On the other hand, the economic crisis that affected the whole world, the increase in the dollar exchange rate and the increase in the construction cost index caused an increase in the real estate market. When calculating the cost of construction, there are two factors that directly affect the cost. The main raw materials used in the construction of a building are iron and cement. These two raw materials have been particularly affected by the increase in the dollar exchange rate.
Due to the war between Russia and Ukraine, price increases in the energy sector and the high dollar exchange rate have affected the iron and cement sector. Therefore, the increase in raw material prices has also increased construction costs.
The main reasons for the increase in real estate prices include the following;
● The rise of the dollar,
● Rising construction costs,
● Rising prices of existing properties,
● People putting their savings into real estate investments due to mistrust of the Turkish Lira,
● Foreigners buying property to obtain citizenship.
2. WHAT ARE THE ECONOMIC FACTORS THAT INFLUENCE HOME PRICES?
In periods of increasing prosperity and rapid economic growth, the demand for housing will increase and people will tend to buy real estate depending on their income and savings. In general, the factors affecting the real estate price in the evaluation made by considering supply and demand in economic terms are as follows:
a. Gross Domestic Product (GDP) and Per Capita Income
In countries with higher levels of prosperity, per capita income rises as a result of the increase in GDP. Individuals with higher income will have higher savings. In this case, individuals tend to buy real estate. This is because individuals want to use this process efficiently and increase their wealth. More individuals tend to buy real estate, which leads to an increase in the real estate market.
b. Real Interest Rates and Access to Credit
Individuals generally prefer to buy using long-term loans for up to 70-75% of the sale price of the property. During periods of low unemployment, high consumer wealth and economic growth, banks reduce loan interest rates and provide housing loans to take advantage of this opportunity. When individuals use loans with low interest rates, they will own a house as if they were paying rent with the loan installments they will pay. During periods of low loan interest rates, demand from individuals increases and real estate prices rise rapidly.
c. Unemployment Rates
If unemployment increases, individuals' incomes will decrease and individuals will be worried about the future. However, in societies with high levels of welfare and low unemployment rates, the increase in individual income will increase the demand for real estate and prices will rise accordingly.
d. Consumer Confidence
During periods of high economic growth, consumers tend to buy real estate when their confidence in the economy is high. Since consumers expect property prices to rise during these periods, they do not take risks and demand increases. An increase in demand also leads to an increase in prices.
e. Urbanization and Demographic Factors
The population growth rate and population density due to cross-border and intercity migration also increase the demand for real estate and raise prices. Especially in large cities such as Istanbul, where demand is high and supply is low, prices are higher than normal.
f. Housing Supply
Another factor that increases home prices is housing supply. Real estate prices generally rise during periods when supply is low and demand cannot be met. Since real estate construction takes place over a period of time, if there are not enough properties to meet demand, prices will rise. During periods of excess supply, real estate prices fall. Therefore, it is appropriate for supply and demand to be in balance.
g. Housing Construction Costs
When construction costs are high, the profits of construction companies decrease. Therefore, they reduce the supply. When the supply of housing in the market is low, prices will naturally rise. In addition, the increase in cost will also automatically increase the price of real estate.
h. Government Policies
In the normal course of business, if the government reduces title fees, real estate taxes and other costs, and encourages low-interest loans through state banks, demand will increase and home prices will rise in line with demand.
ı. Location, Layout, Construction Materials and Comfort
Real estate prices are always high in locations close to places that are important to consumers, such as schools, hospitals, public transportation, social facilities and parks, and shopping centers. It is inevitable that prices will also be high in luxury and developed neighborhoods and residential areas where people with high socio-economic status reside. In addition, the prices of safe, energy-efficient and sustainable buildings built with high-quality materials and earthquake-resistant construction will also be higher than market conditions.
As a result, in recent years, when there have been economic fluctuations in our country and the world, the pandemic, the increase in the dollar exchange rate and the construction cost index have caused prices in the real estate market to rise. However, in periods of economic growth and high welfare levels in the real estate market, prices rise depending on the supply and demand balance.
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