Real Estate E1:R1
◢ Iran's housing market is showing signs of recovery, boosted by new financial incentives on offer from Iranian banks
◢ The Rouhani administration is faced with a balancing act to ensure the housing stock increases in step with demand, limiting inflationary pressure
A Complicated Slump
Iran's housing sector has been in a slump for almost two years. There was a significant increase in activity in this sector back in 2010 and 2011 when Iran's oil revenues soared as a result of high prices. The government of former president Mahmoud Ahmadinejad (2005-2013) boosted redistribution programs and made subsidized housing a mainstay of his economic policy. At the same time, inflationary forces drove investors to “safe-haven” assets, chief among them high-end real estate. But the critical mid-market was squeezed by high prices and limited supply.
Oversupply emerged as both governmental and private investors created an imbalance between supply and demand at opposite ends of the market. Ahmadinejad’s famous mass housing projects disrupted market prices. At the high end, a surfeit of luxury developments followed as banks and construction companies focused on residential developments. As the economy began to falter in 2012 during the most intense period of international sanctions, rapid inflation outstripped the ability of the average homebuyer to keep up with the market. Prices were unable to adjust given the oversupply at the low-end and the speculator-led overpricing at the high-end of the market. Over the last three years, the average Iranian homebuyer has not had favorable pricing or access to adequate housing stock.
Recently, there have been limited indications that the slump in the housing sector is nearing its end. The recovery will be reflected both in recovering prices as well as a healthier volume of transactions in the coming 6-12 months. The latest report on the housing market by the Central Bank of Iran covers the Iranian calendar month of Khordad (21 May - 21 June) and reports a 3.5% rise in the average price per square meter. The transaction volume was down by 0.6%, though this is likely due to the typical slowdown during the holy month of Ramadan.
Generally, the CBI report points to an impending recovery when compared to the same period last year. Transaction volume in Tehran was nearly 37,000 which represents a 5.9% increase year-on-year. The average price per square meter was IRR 42 million, which reflected a 2.7% rise when compared to the previous year.
However, most homebuyers remain unable to participate in the midmarket. In order to drive the recovery, policymakers have been pursuing several policies to promote home ownership. As part of a wider reform that to reduce the country’s interest rates, improved financing opportunities are becoming available to homebuyers. Bank Maskan has announced that it will decrease the interest rate on the special loan product it offers to first-time buyers—the Maskan Yekom plan. This will see the interest rate fall from 13 percent to 11 percent, reducing the cost of financing and contributing to consumer demand.
Applicants are able to apply for financing at fixed amounts: IRR 1.6 billion for residents in Tehran, IRR 1.2 billion for residents in provincial capitals and cities with a population of above 200,000 people, and IRR 800 million for other locations. With the new interest rates, the cost of capital for these loans has decreased by between 9% and 10%. For example, the monthly payment for a homeowner with an IRR 800 million loan at 13% interest over 12 years stood at IRR 11 million. The new monthly payment is estimated to be IRR 10 million. This is expected to further encourage new applications as home buying becomes more affordable for the middle class.
However, the general macroeconomic weakness in the Iranian economy, with stubborn inflation, high unemployment, and limited liquidity continues to squeeze the middle class. To ease the pressure, the Iran Fara Bourse has begun the sale of mortgage-backed securities worth IRR 300 trillion. The bonds will mature in three years and have an interest of 18.5%. The mortgage-backed securities are meant to enable intermediary institutions to sell homes in installments. Officials say there are currently over 49,000 houses that have been targeted to be sold in 144 installments with an interest rate of 13%-15%.
The Balancing Act of Recovery
The balancing act for the Rouhani administration is to recalibrate supply and demand in tandem. On one hand, an increase in the money supply brought on by the decline in the interest rate may raise house prices as the rising liquidity enters the housing market. This will particularly be the case if investors are unconvinced about returns available in Iran’s equity markets. Any upwards pressure on prices and rents would undermine the Rouhani’s administration’s attempt to keep inflation in check, as housing remains accounts for 30% of the market basket. Therefore, the government is under pressure to boost supply in tandem to ease the risk of a price shock. But low profitability has kept developers away from projects to increase housing stock for the middle-class.
Figures released by the Statistical Center of Iran show that the general index for the price of construction materials declined by 1.8% in the last Iranian calendar year of 1394 (21 March 2014-2015) after increasing substantially for each of the past three years. Furthermore, CBI reports show that there has been a decline in the number of construction permits in Tehran over the second, third and fourth quarters of 2015 (the first, second, and third quarters of Iranian calendar year of 1394). The government stimulation plans therefore seeks to boost the buying power of the average Iranian homeowner, while also providing them a better supply of affordable homes, in this way supporting a new equilibrium for the core of the housing market.
New Earthquake Safety Policies
As Iran prepares for the next wave of construction activity in the housing market, important policy is being put in place. The Rouhani administration has made important moves to ban the construction of towers and key buildings on Tehran’s earthquake prone fault lines. Tehran has been ranked 10th among the world’s cities most at risk of a serious earthquake.
The government has sent a map detailing Tehran's quake fault lines to the relevant state institutions in order to enforce a standing band on the construction of high-rise buildings (12 stories and higher) and hospitals near the city’s fault lines.
Mohammad Shekarchizadeh, the director of the research center at the Ministry of Road, Housing and Urban Development, believes that earthquakes pose major risks to Iran's big cities like Tehran, Mashhad and Kerman. He has emphasized buildings that are located near fault lines suffer the heaviest degree of damage in earthquakes.
Shekarchizadeh, whose center prepared the map on Tehran's quake fault lines, added that the government of President Hassan Rouhani is determined to take whatever measures necessary to decrease risk posed by earthquake damage in cities. He added that more studies on potential risks of earthquakes to urban structures will be carried out and will expand to other cities of the country in the near future. The official further emphasized that the required measures are underway to determine the risks to hospitals that have already been constructed on fault lines in Tehran as well as the measures needed to retrofit them to better resist earthquake damage.