Home prices are rising, but not in keeping with the pattern usually seen in Iran. Investors now seem reluctant to put their money in the construction business.
The housing sector, especially in Tehran, is facing another bout of recession due to continuous price hikes that have significantly decreased the public purchasing power.
The rise in prices has been coupled with a notable decline in the number of home deals in many of Iran's 31 provinces during the current Iranian year (started March 21).
Iran's housing sector exited its longest recession in recent memory, which lasted for more than five years, about 10 months ago. That recession is back in sight.
The Statistical Center of Iran's latest report shows home prices increased significantly across urban areas during the second quarter of the current fiscal year (June 22-Sept. 22). The average price of each square meter of residential floor area surged by 44.4% in Q2 on a year-on-year basis.
Compared to the previous quarter, prices indicated a growth of 14.9%. In terms of residential deals, the current year's Q2 saw a rise of 15.8% compared with last year's corresponding period. Against the Q1 of this year, the number of such deals registered a rise of 11.3%.
Upsurge in Prices of Construction Materials
Saeed Eslami Bidgoli, Allameh Tabatabaee University professor and a member of the Securities and Exchange High Council, believes that the shock caused by the upsurge in the prices of construction materials due to the depreciation of rial against the US dollar and its impact on driving up home prices is one reason for the recession.
According to another SCI report, the general price index of construction materials for residential units in Tehran jumped by an annual rate of close to 50% in Q1. the general price index of residential construction materials reached 315.4 during the second quarter of the current year. This figure indicated an increase of 25.7% when compared with the first quarter of the current year that ended on June 21 when the index stood at 250.8 and a 49.1% surge compared to the second quarter of the previous year when the index reached 211.6.
During the year ending at Sept. 22, the index grew by 26.7%. During the year ending June 21, the index had grown by 17.4%.
Inflation Lag
The fact that real estate prices lagged behind general inflation for a couple of years is another reason Bidgoli blames for the recession in the construction sector.
“With the prospects of higher inflation rates, rising costs of materials and the squeeze they will put on profit margins, there are some clear risks to the construction industry, further exacerbated by the uncertainty of Iranian economy,” he told the Persian weekly Tejarat-e Farda.
Data released by the Central Bank of Iran show the point-to-point inflation rate of the housing sector was significantly lower than that of other sectors during the seventh month of the current Iranian year that ended on Oct. 22 (Mehr).
The point-to-point inflation reached 36.9% during the aforesaid month. The overall Consumer Price Index (using the Iranian year to March 2017 as the base year) stood at 148.4 in Mehr, indicating a 4.6% increase compared with the previous month.
However, in the same month, the point-to-point inflation rate in the housing sector was registered at 12.8% by CBI, considerably lower than in other sectors.
The sector's month-on-month inflation was put at 0.9%. In fact, during the seventh month of the current year, the housing sector acted as an anchor that prevented the overall point-to-point inflation rate from rising further.
Two major views dominate the relatively lower inflation rate of the housing sector. One is that an increase in the inflation rate of other groups reaches the housing sector with a lag and therefore the group will face higher inflation reflected in its numbers in the coming months on the back of increased prices of raw materials and services costs.
The second view is that due to a sudden increase in prices due to a declining national currency, demand also suddenly fell in the sector, leading to a relatively lower inflation rate.
"Over the past four years, the general inflation has outpaced the inflation of housing sector. A large part of the housing inflation since the beginning of the current year (March 21) was to level this lagged inflation with an overall increase in consumer price index. It has not ended in increased profitability for construction projects," Bidgoli said.
Economic Uncertainty
The reason cited by the economic analyst for the downturn in Iran's housing sector is economic uncertainty facing the country.
Professional home builders have learnt over the past two decades, often the hard way, according to the expert, that they should not put their money into large-cap projects unless economic stability prevails.
"Therefore, a number of investors prefer to opt out of construction business or skip it altogether at present," Bidgoli said.
“You cannot expect all builders to adopt the same modus operandi. Professional builders have different projects in different phases … What is certain is that unfinished projects are likely to get completed, but the likelihood of recession is high for new projects. Also, the price surge has been different in cities other than Tehran. The breakneck rise in prices of homes in the capital city was much slower in other cities, which indicates that construction hotspots might switch to other urban areas."
The expert noted that inflation and foreign currency rates as well as returns of other markets, such as the stock market, all have an impact on the construction industry.
“As we speak, the dramatic increase in the total volume of money supply in the economy has impacted almost all markets, including the housing market. The prospects of bigger returns from investment in gold and forex market would influence the behavior of investors, worsening recession in the construction industry," he concluded.
According to the Central Bank of Iran, total money supply hit 16.93 quadrillion rials ($164.36 billion) on Oct. 22, which is 20.7% higher compared with the same month of last year.
The CBI also reported a 10.7% rise compared with the end of the last fiscal in March.
