Housing market can be the first refuge of investors and property owners in the new Iranian year (started March 21). However, directing funds from other asset markets is not synonymous with investing in the production and construction sector, as most investment in the housing sector will be spent on capital purchases.
Before describing developments that await the housing and construction market in the new Iranian year (started March 21), it is better to discuss the role of the main players of this market and the main developments that are likely to unfold this year, Ahmad Tavalla, the secretary of Real-Estate Developers Association of Isfahan, prefaced his write-up for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
Inflationary Recession
In recent years, ‘inflationary recession’ has been the most important feature of the domestic real-estate market. In view of the current trends, however, ‘net inflation’ is expected to become the main feature of the domestic market this year.
What we are witnessing now is inflationary recession but it will continue to a certain point and then shift toward net inflation, especially when it comes to home deals because as we speak, a group of people whose approach is to buy residential properties and commercial units are in a state of confusion resulting from fluctuations in other asset markets. They are waiting for the relative stabilization in these markets before entering the housing market.
A new wave of capital demand, which is mainly from other markets, is expected to hit the housing market after the Norouz holidays [March 21-April 2] and Ramadan [ended April 21].
New demands in the spring will reduce nominal recession by increasing the volume of housing deals in urban areas, but all the parameters affecting housing prices indicate a high probability of inflation dominating this market in the new Iranian year (started March 21).
Two Main Players
Two main players are involved here. The first factor is the rapid, continuous and sharp growth of the construction costs resulting from the significant increase in the wage level and price of construction materials and equipment.
In the past two years, the wages of construction workers have increased significantly, which has even led to a noticeable rise in the share of laborers’ wages in construction jobs in the final price of the construction.
In the past, labor wages accounted for 25-35% of the construction costs (excluding the land price) and the remaining was the share of construction materials. This share has now reached 50% compared with the 50% share of construction materials. This is an issue that is not being discussed adequately.
In a situation where the construction materials market is facing severe, continuous and unprecedented inflation, the share of wages has also increased greatly, increasing the costs of construction. In terms of construction materials, although we see an increase in prices every year, this increase has become more intense in recent years.
Another key factor that can lead to inflationary conditions in the housing market is the decline in the supply of housing from new constructions. Given the inflationary conditions of the construction market and the decrease in the financial ability of builders, a large number of small-scale builders are expected to leave the construction market; they will not be financially able to face the current and future increases in construction costs. However, professional real-estate developers will remain in the market.
An inflationary year for the housing market is expected, thanks to the increase in construction costs on the one hand and a decline in supply on the other hand.
Examining the factors affecting the behavior of builders and the construction market leads to believing that inflationary conditions are down the line. At the same time, the housing market is expected to become the first refuge of capital this year.
Given the peak of asset markets such as gold, currency and gold, it seems that fluctuations in these markets will be transferred to the housing market and owners of these assets will direct at least part of their capital to the housing market.
Speculators have always been one of the contributors to high prices in various markets, especially the housing market. Sentiments in the asset markets will be lower compared with last year, but the likelihood of fluctuations spreading to the housing market is not low.
Macro-Scale Risks
The state of housing market will depend on economic and non-economic conditions on a macro scale.
It is not possible to improve the situation only from within the housing market. In fact, the sharp and continuous growth of construction costs and even the increase in speculative and non-productive activities are the result of sentiments in other markets, currency fluctuations following the increase in inflation and economic and non-economic risks on a macro scale.
If the policymaker seeks to solve the root cause of the crisis in the markets, including the housing market, they should try to direct capital toward production in all sectors, namely housing, agriculture and industry. It is also necessary to curb the unbridled growth of construction costs by trying to minimize and eliminate inflationary expectations caused by economic and non-economic risks at the macro level.
In fact, increasing production and directing money to production is the only factor that can control the economic losses caused by the turmoil in property markets. In addition, any measure that can limit speculative and unproductive activities in the markets can be useful and pave the way for a relative improvement of the economic situation.
As long as the current situation persists and speculators continue to move funds from one market to another, we cannot hope for an improvement. The macro-level policymakers need to first increase the risk of speculative practices and control unproductive activities. As long as the general economic and business conditions do not improve and inflation and inflationary expectation are not controlled, there will not be much improvement in the markets, including the housing market.
