The government’s bill on taxing frequent housing transactions can be considered the beginning of a new round of measures aimed at managing the housing market. The government hopes to control speculative transactions and control home prices by passing the bill. If approved by the parliament, buyers of homes and plots of land with residential use have to pay 60% of the profit from the price increase to the government as tax if they sell their properties within the first year of ownership. In the second year, the tax rate decreases to 40%. Naser Zakeri, economist, prefaced his write-up for Persian daily Shargh with this note. Below is a translation of the text.
Regardless of the effects of the implementation of this new move, the step taken by the government to pass this bill is commendable for two reasons: it acknowledges that the government has duties in the housing market and must come out of the inaction phase and disregard for the seismic developments of the market.
On the other hand, the rental housing market did not pay attention to the decisions of the heads of government regarding the permissible rent increase ceiling over the past four years. Such indifference did not encourage officials to think about enforcing necessary laws.
However, it seems that the approval and implementation of such a law cannot necessarily create a significant change in the housing market and help contain the crisis.
The government apparently believes that frequent transactions of residential units play a key role in the rapid increase in housing prices whereas evidence to support this hypothesis is not compelling.
3 Questions for Starters
Those who have proposed this bill need to first answer three fundamental questions:
What percentage of the homes purchased in the last 10 years have been sold in the first year or the second year of ownership? In other words, what is the weight of the factor called “frequent transactions” in actuality?
Assume that “frequent transactions” account for a big proportion of the market; why do those who have proposed this bill believe that the removal of such a factor can have a significant effect on the growth of home prices? Will the real-estate buyers stop short of buying properties knowing that it would turn out to be costly if they engage in “frequent transactions”?
With what mechanism will the tax instrument push speculative demand out of the market? Is it not possible for speculators to reduce frequent transactions and refrain from selling their properties in the first two years, rather than leaving the market outright? Is there a good opportunity to invest and earn profit outside the housing market, so that speculators take their money to that alternative market?
Housing Versus Car Market
It seems that the authors of the bill do not distinguish between housing and car markets. In the car market, dealers make a decent profit through buying directly from factory and re-supplying them to the market after increasing the car price compared with the approved factory price. In this market, if frequent transactions are limited, dealers will have less incentive to enter because no dealer buys a car with the intention of keeping it for a long time. This is not the case in the housing market. Speculators in the real-estate market do not necessarily buy with the aim of immediate sale; many of them rent out the unit or provide a part of the price of the property by renting it as a full mortgage. In such a market, unlike the car market, restricting frequent transactions cannot prevent the presence of speculators. In addition, enforcing restrictions will prevent activities such as the reconstruction of old units; the least negative outcome is the decline in the optimal age of buildings and increase in depreciation costs.
Speculative Demand
The phenomenon of frequent transactions is an insignificant problem of the housing sector; the main problem is the presence of speculative demand. Now, half of the residential units in Tehran, i.e. 1.6 million, are owned by speculators and have been rented out. The current value of these units is about 50% of the value of stock market. The entry of such a huge amount of liquidity has led to an astronomical jump in housing prices. Therefore, the resources of those in need of housing have never been enough to compete with the resources of speculators.
Containing the housing crisis is contingent upon the gradual expulsion of speculative demand from the market and directing this huge liquidity to the productive sector of the economy. Such a bill fails to produce intended results. I recommend that the government taps into the knowledge of experts to develop an informed plan to curb the speculative demand and use this unique opportunity to be remembered in history.
