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Loans and Housing Industry Realties
Domestic Economy

Loans and Housing Industry Realties

For some time now a hot debate is underway in Iran about the effectiveness of proposals by the government to help pull out the key housing sector from punishing recession and at the same time cut the ever-increasing dole queues.
The Rouhani administration has come up with ideas to revive the housing industry. First it proposed the “social” housing scheme to replace the highly controversial multi-billion-dollar  ‘Mehr Housing Scheme’ – a pet project of the former government. Both projects were initiated to help millions of low- income households buy apartments in the suburban areas of big cities.
Now the current administration claims that its new plan, with a focus on the demand side, would, among other things, help augment the purchasing power of the lower middle class – contrary to that of the former government which had primarily focused on boosting supply by allocating massive financial resources to large-scale housing builders, a policy that ultimately led to unusually high levels of  liquidity and runaway inflation.
The second effort of the Rouhani administration to shore up the housing industry has been the establishment of the so-called ‘land and structure funds’ to raise money for major constructors in a way that has less inflationary impact.
And the creation of a ‘mortgage fund’ in each commercial bank has been another possible solution recently offered by the government to stimulate demand, while at the same administration officials have increased mortgage ceiling to 800 million rials. Such policies have attracted strong criticism.
So far Bank Maskan (Housing Bank) is the sole mortgage provider. If and when the new policy comes into effect, all commercial banks will be obliged to establish special funds to provide thousands of mortgages to prospective clients.
The loan ceiling is expected to hover around 800 million rials (about $25,000) to 1 billion rials ($30,000) depending on the location of the housing unit.
Despite the increase in the mortgages, critics argue that they are not at all enough to buy an apartment because the  latest data by the National Statistical Center of Iran shows the average price per square meter of a residential unit in the country was 14 million rials ($430) last year, which ended March 20. The figure for Tehran dramatically surpassed the average climbing to 32 million rials ($984).

 Proponents
Now that all banks are to take responsibility to grant mortgage loans, it seems more practical for banks to attract liquidity and reproduce it as loans. So no new liquidity would be injected into the saturated market nor would the move lead to higher inflation.
In other words, potential homebuyers would be encouraged to create mortgage deposits, and housing units will be financed by household savings rather than cash injected by the central bank.
The government has additionally vowed to subsidize the interest rate of such loans to lessen financial pressures on the debtors.
Proponents of mortgage funds believe that under the present circumstances, when the housing market has experienced pretty long bouts of recession, injection of financial resources in the form of the proposed mortgage loans would lead to a healthy increase in demand.
Mortgage loans should help improve the atmospherics in the present housing market if they are truly granted to those in need and not to the greedy brokers, middlemen or their minions, some proponents note.
Some experts believe that although the loans might be insufficient in megacities like Tehran, Isfahan, Mashhad…they will help people residing in smaller cities to buy an apartment, as the 800-million-rial loan hardly comprises a fifth of a housing unit price in many parts of the sprawling capital now home to nearly 13 million.

 Opponents
However opponents warn the government against negative impacts of the loans, claiming it will garner too much support for the demand side. They argue that increase in loan ceilings will drag inflation back to super highs of yesteryears.
According to them, first of all, increasing purchasing power of homebuyers will raise demand, and when demand outstrips supply, specifically in large cities, inflation will rear its ugly head as a consequence. Second, mortgages more often than not are tranquilizers and, in the long term, will increase liquidity and property prices. Third, providing loans without considering borrowers’ ability to repay would eventually put both borrowers and banks in trouble.

 Solution
The first condition to guarantee each applicant with housing unit is to improve the dominant economic conditions as well as harmonize other markets in par with the housing sector. The country crucially needs some affordable lending mechanism that brings savers, borrowers, commercial banks and lending institutions together and makes money available for households to finance expenditures and investment, an expert told Financial Tribune.
In addition, it would be practical, and indeed essential, for banks to cut interest rates on housing loans to set the record straight vis-a-vis the huge but complex housing industry and the unending list of Iranians wanting to have a shelter of their own.

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