At times, axioms of economics are not properly understood in Iran and the causality principle is misinterpreted.
For instance, a rise in rent rates, which is the result of increasing property prices, is being explained abstractly, Gholamreza Salami, a housing expert, says. A translation of his article for the Persian economic daily Donya-e-Eqtesad follows:
The rising prices of residential properties is usually viewed as a cause, whereas it is the effect of other causes that stem from government decisions.
How do we perceive the price of an item as high? Compared with the current salaries of workers, everything is expensive. The price of a kilogram of meat or a liter of milk is much more expensive for an Iranian worker than a German or Dutch worker, but when compared with the value of the euro or iron beams, they do not seem expensive. A comparison of the price of euro and iron beams in 2011-12 with the average price of per square meter of housing shows that even in Tehran, the latter was not more expensive than in 2011-12, but housing prices have definitely increased in view of the purchasing power of people.
The cause is obviously the misguided monetary and fiscal policies taken by consecutive governments, which manifest in the form of runaway inflation and a decline in the purchasing power of a majority of people. We will understand how futile governments’ efforts are to counter rent growth if we acknowledge that rent growth has been driven by rising housing prices and that, in turn, have been driven by the inflation contrived by governments.
P/E Factor
The relationship between the cost of capital and earnings (P/E), taking into account the risk factors and without considering inflation, is almost the same in all countries that are governed by economic laws.
The interest rate (P/E of bank deposits or treasury bonds) is usually the criterion. For example, the P/E of stock exchanges in the United States increased sharply during the economic crisis of 2007-08 as a result of the significant reduction in interest rates on bank deposits and government reforms. This decision surely affects the P/E of other investments, including housing.
The interest rate on deposits in Iran has fluctuated around 20% over the last two decades. Therefore, the P/E of bank deposits has always been close to five, which is not an attractive number considering the inflation, but people have no other option but to put their money in banks.
Prior to the enforcement of the new Landlord and Tenant Law of 1997-98, people were not interested in making investment in rental housing because of the high risks of government interventions. Following the passage of this law, the production and supply of rental housing units increased sharply.
In Tehran, the ratio of tenants to landlords increased by the day; however, the ratio in Iran is still far from the standards of European cities because of the lack of commercial leasing.
During these years, the P/E of residential property in Iran’s urban areas averaged at 20. Although the number is much larger than the P/E of bank deposits and it is seemingly less profitable to invest in housing, the tendency to invest in rental housing has increased in the long run and a relative balance has been struck between supply and demand because of the chronic inflation.
Over most of these years, the share of housing costs in the household expenditure has been higher than in many other countries; inflation and the decline in the purchasing power of lower middle class are to blame but still it was possible to bring calm to this market.
During these years, despite having regulatory infrastructures such as full tax exemption for commercial rental residential units according to consumption patterns, governments did not take effective measures to construct rental housing complexes to create investment institutions, while the biggest support that can be lent to middle-class and poor people is by putting cheap rental units at their disposal.
In welfare states, governments only pay the subsidy (through the transfer of national lands, tax exemptions and the payment of rent surcharges) and the rest is done through market mechanism and the private sector.
The procrastination of governments over the past 50 years in adopting efficient economic policies, especially in the housing sector, has led to the formation of urban slums, marginalization, expansion of urban decay and inadequate housing for almost a quarter of the country’s population.
Recent Housing Crisis
However, the recent housing crisis is arguably the most serious of its kind in the last half century. The 800% increase in the exchange rate of the dollar after the fiscal 2018-19 and the subsequent growth of housing rates have denied a large number of people, especially young people, the opportunity to buy a home.
It is natural that the increase in housing prices is transferred to rents and, in the medium term, the housing P/E normalizes. This gap seems to have widened slightly for a variety of reasons, including the sympathy a majority of landlords have regarding the economic situation of tenants.
At present, the average P/E in the Iranian rental market is about 40, which is definitely far from the status quo before the crisis. This has made even some economists to believe that the price of housing is higher than its real price and expect it to fall whereas the current rental rates have not been able to rise as expected; a flare-up in the rental crisis beyond what it is now will certainly happen in the near future (it is enough to look at the rise in rents in the last couple of months).
It is necessary to point out to the use of high P/E in the rental market by professional stock market traders. In the stock market crisis of 2020-21, stock traders compared the high and irrational P/E of the stock market with the rental market and insisted that this number could increase by up to 40 in the stock market, while the nature of the assets and the risk involved in these two markets are different.
Total assets are tangible in the rental market while in the stock market, a significant part of assets are intangible (such as brand, customers, etc.), therefore the risks involved in the stock market is much higher than in the rental market.
Harmful Regulations
Overall, the governments’ response to this crisis in the country, at least in the medium term (and seemingly in the long term), was to ignore the issue.
The previous government’s initial move to put a cap on rents growth to a maximum of 25% during the pandemic was acceptable in 2020, but its continuation into the following years, especially in the current year is impermissible. Setting a cap on rent increases will be to the disadvantage of the economy and tenants.
Notably, landlords and tenants have reached an agreement over the past two years, despite the government’s regulation, to almost double the rents each year. There are concerns about government policies, including the tax on vacant homes and tax increases in the price of properties. These regulations have reduced investment in housing and have paralyzed the production of goods and services, as well as the supply of housing.
It is enough to look at the statistics on building permits in the last two years. A comparison between building permits issued in Tehran in the fiscals 2021-22 and 2001-2 indicates a yawning gap (a fall from 25,000 to about 7,000 permits); investors’ interest in real-estate development in urban areas is dying out. This comes as the 13th government [of President Ebrahim Raisi] has failed to come up with a detailed plan to provide appropriate rental housing for people, despite all its promises.
