The Iranian government is capable of preparing the ground for economic reforms by planning a measured cleansing of real-estate market from speculative practices, Nasser Zakeri, an economic expert, said.
What follows is a translation of his write-up in the Persian daily Shargh:
Statistics show that the ratio of residential properties to households is not large. However, you can’t find a person denying the crisis that looms over the real-estate market.
Out of 26.4 million households in Iran, over one-third (and counting rapidly) lives in rented homes. Soaring home prices have caused affordability to drop dramatically in recent years; many newlywed couples have given up on the dream of owning a home.
Yet, the number of real-estate agencies has increased from 72,000 in the year ending March 2012 to 150,000 now. These figures provide an insight about the depth of housing crisis in the country.
Misguided policies employed by governments have resulted in a sharp increase in money supply over the past decades. Accordingly, common rent-seeking activities have helped the disproportionate distribution of money among people. On the other hand, sanctions and the decline in exports and closure of manufacturing enterprises wiped out opportunities for sound investments to absorb the liquidity. As a result, the liquidity found its way into real-estate market and created large-scale speculative demand for housing.
At first glance, you can regard the rise in home prices as a response to the general increase in the prices of goods and services. The double-digit inflation rate would normally manifest in home prices as well. But a deeper look tells us that the rise in housing prices acts as a propeller that pushes price growth and inflation.
With the increase in money supply, speculative demand increases and that drives up the end prices of all goods and services in the market.
Besides sanctions, mismanagement and other factors, the surge in real-estate transactions was conducive to the deterioration of economic situation and livelihoods of low-income people, which eventually moved a large number of households into poverty.
Over the years, governments have tried a variety of real-estate policies that failed; the policy of increasing home loans only worked to the benefit of speculative investors as they managed to build value in the properties owned.
Initiatives like Mehr Housing Project, social housing or establishment of housing funds could not resolve the housing challenges. None of the governments has confronted speculative demand either due to their lack of awareness about its destructive power, or the clout of real-estate moguls in influencing decision-making.
Imposing restrictions on speculative demands and gradually removing liquidly from real-estate market can alleviate pressure on real demand and on the low-income strata on the one hand, and on the other prevent the growth of prices of locally-made products and maintain their competitiveness.
Those with the so-called wandering liquidity will have no option but to invest in other economic sectors like stock market and bonds, which investments can help the national economy thrive.
However, the new government needs to first show its willingness to plan the measured cleansing of real-estate market from speculative practices. By setting a cap on the number of properties an individual can own in urban areas, particularly in large cities, real-estate owners who have been hoarding up properties and who multiplied their wealth overnight will be forced to sell their properties.
In fact, the government needs to introduce changes in ownership and dismantle the modern feudal system in the housing market rather than encouraging real-estate development or increasing loans and banking incentives. The government needs to cement its standing in the national economy.
The government needs to immediately implement effective management strategies to minimize the disturbing conflict of interest in the real-estate market. For instance, a government official owns three apartments (according to his own account) and 10 according to his critics. He would normally oppose this orthodox policy. Or, governmental institutions and organizations that have invested their resources in the real-estate market would normally resist any change, as they all want to maintain the status quo even at the cost of the national economy.
Lifting the stringent US sanctions must be the first step to salvage the economy. But in the short term, taking measures to regulate the housing market would bring about positive and promising results, including a fall in home prices and rents, improvement in the welfare of renters, decline in the expenses of manufacturing and commercial enterprises, rise in demand for stocks and growth in economic activities, thanks to the decline in the expenses of starting a business.
