Saeed Sa’adatmand, a housing expert, has presented an overview of Iran’s real-estate market from both supply-demand sides in an article for the Persian economic daily Donya-e-Eqtesad.
A translation of the text follows:
Housing is the centerpiece of Iranian household expenditure, as 90% make the largest investment in their lifetime on home ownership.
Many investors in other economic sectors, banks and companies use their residential properties as collateral to start doing business.
Statistics show housing is one of the largest sectors of the Iranian economy, accounting for 15% of the employment, either directly or indirectly.
Being the top consumer of intermediate goods, the construction and real-estate industry contributes to 18-20% of the country’s gross domestic product. Therefore, developments and trends on both sides of the housing market, supply and demand, are elemental when it comes to economic decision-making.
Supply
Statistics indicate that the private sector has been the trailblazer for making the highest investments in real-estate development, except during the peak period of Mehr Housing Plan, when government intervention was at its height.
It is safe to say that the construction industry is one of the few economic sectors in which market mechanisms prevail [in Iran], as prices of production inputs are being set outside the government’s playing field. Four main production inputs, namely land, legal permits, construction materials and wage, determine the end price.
- Land: These days only a few do not know of the limited supply of land in urban residential areas. This valuable input, which will become costlier in attractive urban areas over time, is in low supply. It is also possible to see a decline in the prices of land due to the ownership status in the household asset portfolio. Land owners supply this input after taking into account the maximum possible profit or suitable replacement potential.
- Legal permits: Traditionally, the costs of legal permits have been on the rise over the years, averaging at 20% [annually]. Therefore, we need to expect an increase in the end costs of permits next year, both directly and indirectly.
- Construction materials: The growth in the prices of building materials will be in tandem with the general inflation and the prices of energy carriers. The current year’s [March 2021-22] inflation rate has been measured at 42% by official institutions, thus you can’t envisage any lower inflation rate for the next fiscal year [starting March 21]. The minimum increase in costs will be 50%. If the prices of energy carriers go up due to the energy-intensive processes of production and distribution of construction materials and the cost of transportation, the inflationary effect might be many times more than the general inflation. Under this scenario, high costs will make construction projects carried out by the private sector economically unviable. As a result, the overall number of construction is bound to decrease next year.
- Wages: The increase in wages of construction workers will hover around the inflation rate. Changes in wages will leave the quickest impact on the end price of construction projects.
If the minimum inflation assumptions for next year are taken into account and in case land prices increase by 20% and the costs of other production inputs increase at a minimum, the average cost price of housing units in a city like Tehran will increase by 30%.
For smaller apartments, price growth might stand at 50%. Given that the costs are mostly being financed from the builders’ property, with the increase in construction costs, the potential construction, as per the area of the unit, decreases and this would lead to longer term projects and lower supply.
One of the promises made by the new government was the supply of one million homes annually. However, experts believe that such a promise will not be achieved in 2022-23, thanks to the nature of real-estate development. It will take at least 18 to 24 months to start and complete a mass housing project. Therefore, we can conclude that supply will decline and prices will increase, which would give rise to stagflation.
Demand
Lack of housing affordability is adversely affecting consumers. Calculations show Iranian households have to wait for years to find the opportunity to buy a home.
At present, consumer demand enters the market with a delay of up to 15 years. The presence of these middle-aged households in the market creates minimum consumer demand. This level of demand will give rise to the formation of minimum consumer deals next year. The first priority of these buyers will not be new homes, though.
Nuclear Negotiations
Iran’s nuclear talks with the West have not reached a definitive conclusion yet. But signals sent by the former fundamentalist naysayers that the revival of the agreement has been finalized and that direct talks between Iran and the US might be possible have created sparks of hope.
However, the burdensome economic structure of the government will not allow the local exchange rate to appreciate against foreign currencies in the medium or even short term. Other parallel markets can be more attractive to investors than the housing market.
Parallel Markets
Investors may not be confident enough about other parallel markets, including the stock market, gold, bank deposits or forex. However, real-estate market has always been and will remain a safe haven for households.
The housing sector will suffer from chronic and creeping inflation on the supply side. Risk-averse investors will continue to be present in the market; they will not change their portfolio.
Given the economic performance of the government, consumers will try to buy homes they need as soon as possible. The market is likely to struggle with stagflation up until the end of 2022-23.
