Loans are generally insufficient to plug housing affordability gaps, so a more sustainable solution is to tackle the factors that make costs so prohibitively high in the first place, Gholamreza Salami, a housing expert says.
A translation of his article published in the Persian economic daily Donya-e-Eqtesad follows:
As per the decision of Money and Credit Council, a top financial decision-making body with the Central Bank of Iran, the ceiling on home loans will increase twofold to help resolve the housing problem of people, particularly first-time homebuyers.
However, a simple analysis shows that such decisions not only fail to solve the seemingly intractable housing problem, but also create more knots in the already tangled lives of people who are desperate for a roof over their heads.
As a general rule of thumb, taking out home loans, which require the borrower to make long-term deposits, usually prove counterproductive in countries with chronic inflation. In other words, loan applicants are bound to suffer more losses as time passes. This has happened several times in Iran and is likely to happen in the future, as the current trend persists.
A Case in Point
For more clarity, imagine a home loan applicant who has managed to save 1,000 million rials ($3,565) in the fiscal 2017-18 and deposited the sum at Bank Maskan, the state agent bank of the housing sector, to take out a loan worth 2,000 million rials ($7,130) after two years. They have planned to add 1,000 million rials more to purchase a 60-square-meter apartment in downtown Tehran.
With a sudden jump in home prices, the poor depositor gets to know that with his depreciated money, they can’t even buy a smaller apartment in a cheaper neighborhood. This is because the purchasing power of their savings and investment has shrunk from a 20-square-meter apartment to a five-square-meter apartment in the same neighborhood.
As mentioned above, inflation has befallen this recurrent misfortune on many homebuyers over the past 50 years. The only exception was during the years when the ratio between interest rates and inflation was reasonable; that led to the decline in investment in small housing units. Consequently, despite inflation, home prices remained stable for a couple of years. Such type of home loans (taking out loans in return for making long-term deposits) added value to money and was acceptable, but due to the termination of home loan financing (an imbalance was created between the value of deposits made in banks and loans they had to offer and the government’s unwillingness to compensate this deficit), only a few people managed to seize this opportunity.
Besides, rent-seekers managed to make deposits and then sell the loan to real applicants and make immediate, handsome gains.
Economic Realities
In Iran, the housing issue has always been viewed as an island, a problem separate from other segments of the economy. Efforts have been made to solve this issue, regardless of the economic realities.
The first prerequisite for solving the housing crisis is to boost production and generate a balanced economic growth based on spatial planning. In other words, people won’t find peace of mind, housing-wise, without being able to repay home loans or rents from their income.
Regrettably, the country has been deprived of prosperity and growth for years now. Employment and the income of individuals have declined and under the circumstances, an increase in the value of loans won’t help resolve the problems, it would only add to the sorrows of lower-middle-income deciles of the society and the government’s subsidy-rent will benefit those who don’t need this subsidy.
Make note that each installment of the 4,000-million-rial ($14,260) home loan with a repayment period of 20 years and a lending rate of 20% (which is still lower than the end cost of the loan for banks) is around 70 million rials ($249) per month, which figure is too high compared with the average salary of individuals in Iran, even those with university degrees.
Suppose a significant part of the interest on this loan (for example, eight percentage points) is to be paid by the government, the borrower has to pay a monthly installment of about 50 million rials ($178), which is still unaffordable for many who need the loan. On top of that, the monthly payment of 20-million-rial interest-subsidies ($71) on the part of the government for several million borrowers will impose tens of billions of rials annually on a dysfunctional budget already grappling with severe deficit problems.
There is no hope of a change in the course of the current way of home financing, given the recent unnerving proposals made about offering 10-billion-rial ($35,650) worth of home loans that require deposit accumulation of 15 years. The monster named inflation is likely to have eaten away the whole promised loan after years of anticipation by homeless applicants.
Even if the government were to offer home loans immediately after receiving an application, the rising home prices, as a result of the sudden increase in demand and low supply, will outweigh the loans.
The delusion of 2.5 million empty residential properties and all the hustle and bustle made by the parliament and government to discourage housing speculation via vacancy tax and other punitive measures, which are bound to inflict losses on homeless people, will also fail to solve the housing problem.
As of this writing, no clear statistics on the classification of these vacant housing units have been given to the people by the authorities. But if most of these homes are the likes of those constructed in districts One, Two and Three [of Tehran], then even the 4,000-million-rial loan ($14,260) can’t buy as much as 2% of the value of these so-called “hoarded” empty properties. The supply, out of desperation for these homes, could bring huge profits for some people that must be taken into account.
Finding an answer to the problem of inadequate, poor housing without resolving macroeconomic uncertainties regarding production, economic growth, employment, productivity and above all inflation is impossible. Applying a tunnel-vision to decision-making won’t solve any problem; acting on impulse and taking irrational decisions would lead to a mid-term recession in real-estate industry.
But if the incumbent government, led by President Ebrahim Raeisi, is really willing to do what it takes to heal the housing market in the short term, it can encourage developers of residential complexes to ramp up production and prepare the ground for their direct cooperation with prospective home-buyers via the efficient mechanism of real-estate presale. It can also induce banks to provide builders with loans at reasonable, unsubsidized lending rates.
Now if the remaining part of the needed resources is provided from the presale funds, the developers will be able to push construction further according to applicants’ consumption pattern with a minimum investment and at the necessary speed. With the transfer of loans from builders to buyers, banks will be able to receive the installments from the government and buyers.
Making use of the presale method will protect buyers from future inflation and builders from the risks of liquidity and idle funds; it will also allow the government to allocate interest subsidies to those who really need them since many applicants, who are now paying rents more than the value of installments or the 20% interest rate, don’t need the government’s subsidy.
However, providing them with loans and financial assistance is one of the responsibilities of the government, which will also reduce the current market demand and help stop the constant rise in housing prices.
