You can envisage a wide range of options and developments about Iran’s housing market in the near future, under the prevailing macroeconomic conditions. Nevertheless, the most probable scenario for the housing market is that it will remain relatively stable in the coming months. This was stated by Fakhreddin Zaveh, an economist, in a write-up for the Persian economic daily, Donya-e-Eqtesad. A translation of the text follows:
In economic studies, housing is considered a durable commodity which, apart from its consumption aspect, is considered an asset. Over the past few years, the asset part of housing has overshadowed its consumer-commodity part. Today’s high prices come from the combination of regular increases in the country’s housing market and price shocks stemming from non-economic risks.
Over the past few years, with the forced exit of most consumers, the housing market has been seized by professional traders, and consequently we see that the housing market, which used to react slowly to macroeconomic developments, has turned into a responsive market; developments in the housing market are happening at the same pace of other asset markets, particularly the foreign currency exchange market.
You can see sharp declines in the number of deals and sharp increases in home prices despite low demand. Although housing prices have lagged far behind general inflation in other goods and services over the past year, current housing prices are still unaffordable for most consumers.
The inadequate development of the financial housing market is rightly regarded as a major problem, but in view of the current situation and available home loans, even if it was possible to take out a big loan, for example, covering 80% of the property’s price, the repayment of the loan would be very difficult for many applicants at the current level of their incomes.
Three Scenarios
As macroeconomic developments influence the behavior of the housing market, at least in recent years, and the long period of sharp price jumps in the housing market has finally come to an end, we can outline different scenarios about the future of the housing market.
These scenarios are based on changes in the aforementioned variables and the stability of other factors affecting the housing market. Since various factors affect the housing market, a serious shift in other factors requires separate studies.
According to the benchmark scenario, where non-economic risks remain at current levels and markets are not severely troubled, the current housing market conditions, wherein it lags behind general inflation growth and gradual adjustment of real housing prices, are expected to see a gradual increase in prices in line with the general increase in the level of prices of other goods and services.
In an optimistic scenario where there is a serious change in Iran’s interactions with the world, especially if the country finds the opportunity to export oil and access its frozen revenues, I expect inflation to decline significantly.
Although housing will most likely lag behind the general inflation compared with other assets (especially foreign currency and gold and, to some extent, stocks), it will be an attractive market for long-term investment.
Traditionally, the housing market resists nominal price reductions. Therefore, you can expect that with new investments in the market, the demand side [investment demand] will be strengthened. Under such a condition, the real housing price adjustment can be expected to be slower than in the optimistic scenario.
In pessimistic scenarios where non-economic risks are exacerbated, I believe most of the negative shocks won’t be able to drive up housing prices; gradual adjustments of housing prices remain the most likely option. A sharp growth in the housing market will be probable, only if these risks increase to an unprecedented level. As the probability of this scenario is low, the general assessment is that among various scenarios, the gradual adjustment of the real housing prices — to varying degrees — is the most likely option for housing prices in the near future.
In terms of the number of deals and the fact that a sudden growth in the purchasing power and real income of people won’t be probable, I expect the asset part of housing will continue to dominate its consumer-commodity aspect. In other words, investors [and not consumers] will hold their ground in the market.
Finally, I need to point out two main prerequisites for sustainable improvement of the housing sector. The “Surge in Housing Production Law” underlines the development of the housing financial market, offering a good opportunity for policymakers to prepare a suitable platform for developing the country’s housing financial market through detailed planning and operational measures.
Although a list of measures and institutions can be put together for the development of the country’s financial housing market, some of the most important ones are the establishment of real-estate investment funds and the secondary mortgage market as well as learning from the experience of other countries regarding new types of mortgage facilities.
But more important than the development of the housing financial market is achieving sustainable economic growth through vital structural reforms in various fields (monetary, foreign currency, banking, fiscal policies, improvement of the business environment, etc.). After all, sustainable economic growth is nothing but an increase in the income of the general public; it is a necessary condition for expanding and deepening the financial housing market.
