Iranian censuses show that despite the increase in the number of home owners, the share of rental housing has increased twofold in as many decades.
This significant growth can be partly attributed to demographic and cultural developments.
Iranian households are generally willing to own their place of dwelling, as they resort to buying residential properties in order to protect their money’s value from the impact of inflation, reads an article by economist Fakhreddin Zaveh who recently wrote for the Persian economic daily Donya-e-Eqtesad.
The translation of the text is as follows:
Unlike the housing market, in which the asset aspect of housing plays an important role, the rental market can be considered a consumption market. This difference is enough to explain that inflation in rental housing market is more lasting than a hike in home prices.
Increases in home prices are volatile (short periods of rapid growth and longer periods of nominal price stability). This comes as growth in rents is much more stable and in tandem with the general inflation of other goods and services, i.e., whenever housing prices see a sharp increase, the growth in rents is usually more modest.
For example, home prices have increased sevenfold since the year ending March 2018 up until now while rents and headline consumer price index have both risen by only about half that amount.
Downtrend in Households Income
It is necessary to review the falling trend in the average income of households since the mid-2000s in order to understand the current state of the rental housing market. The combination of a long-term decline in purchasing power and price increases stemming from non-economic risks imposed on the housing market as well as the failure of housing finance market in supporting prospective home buyers resulted in the expulsion of many households from the housing market and they were forced to take resort to the rental housing market. The decline in the real income of households has a direct impact on the rising share of housing costs of urban households.
In the 2000s, the share of housing costs reached one-fourth of the total expenses of households. As we speak, housing costs account for more than 40% of households’ total expenses.
Official statistics show the share of housing costs in the expenses of the 10th decile [those with the highest income] is more than the share of housing costs in the expenses of the first decile [those with the lowest income]. But bear in mind, this spending is a choice for the rich whereas it is an unavoidable expense for the poor.
Living in rented homes might be difficult, yet rental housing market has great potential to solve the housing problem. In some high-income European countries, such as Germany, almost half of the population meets their housing needs via the rental market. This comes as many of them have sufficient income to buy a decent home.
The capacities of rental housing market can be tapped to improve housing. However, policymakers are more inclined to focus on the housing ownership market than the rental housing market.
Professional Rental Market
Long-term policies have not been designed for the rental housing market. At present, Iran’s rental housing market is facing a bevy of problems. I believe that it is vital to use the capacities of professional rental companies. When compared with small landlords, by establishing professional rental companies, the country can take a positive step toward improving the rental market in other fields related to the needs of tenants.
Perhaps the development of real-estate investment funds is the most important requirement for establishing the professional rental market. Recently, the permit for establishing the first real-estate investment fund has been issued in the country. This financial institution relies on generating income from renting out its properties.
The legal and regulatory frameworks necessary for the proper development of these institutions are essential. Professional rental institutions account for 3-7% of the GDP of real-estate sector in the world. The figure shows the high capacity of these institutions to provide sustainable and professional rental housing.
These funds have multifold benefits; they are good for the financial market of the country, the real-estate sector, micro-investors and the housing market as a whole. Of course, the scope of activities of all funds is not limited to residential properties.
You need to take note of the following two points about the operations of financial institutions: Having an economic logic regarding the development of rental housing institutions is essential. In general, the expansion of housing financial institutions, from improving mortgage facilities to complex mechanism such as mortgage-backed securities, depends on controlling the chronic high inflation in the Iranian economy.
Real-estate funds are no exception. Professional rental market is a mechanism for long-term investment in the housing market. Success in this market, like any other long-term investments, has a negative correlation with inflation.
Long-term investments, including putting money in professional rental market is menaced by uncertainties and risks combined with high inflation. Therefore, it is vital to control inflation in order to improve the financial housing market and taking effective support policies in the housing market, such as financial rent assistance to target households.
Experiences of other countries show that granting financial rent assistance to target households can be effective in helping them meet their housing needs. On the other hand, employing these support mechanisms will help the growth of real-estate investment funds by strengthening the demand side of the rental housing market.
The success of the rent assistance mechanism requires the proper identification of target groups, accurate goal setting and establishing a systematic mechanism to determine the amount of financial assistance to each household according to their income and district, or even neighborhood, as well as proper planning and sustainable resource allocation. Setting up such a mechanism is complicated but possible.
It is also important to remove obstacles in the way of developing small homes. Small residential properties may not be ideal for some policymakers and housing experts for a variety of reasons, but they can meet the needs of the society, particularly in large cities where land is limited and expensive. Obviously, small homes are more affordable. Contrary to the expectations of some experts, these units are not going to solve all the problems of the country’s housing sector. Not all applicants for housing are large households with children; having access to a suitable, safe and affordable home might be the first priority of some applicants, such as young couples or single-person households who are forced to live or study in a city like Tehran.
