The housing market in Tehran, unique in Iran because of the amount of capital that flows into it, has been on a bumpy ride for the past two years. It has faced rapid price surges as well as a steady increase in demand, but has so far been unable to find a compromise between the two.
The influence of this market on domestic investment, employment, wages and debt should put it on the list of top priorities for the government. The housing sector attracts 30 percent of investments, 25 percent of bank credits and about 25 percent of the total liquidity. It also accounts for 12 percent of the country’s total employment.
Housing in Tehran has reacted strongly to the devaluation of the rial, which reached its peak two years ago when the EU and the US imposed tough new sanctions on the country. Data provided by the Statistical Center of Iran (SCI) shows that residential housing prices in Tehran increased by 83.2 percent in the Iranian year 1391, which ended in March 2012, and another 51.9 percent in the subsequent summer semester. Simultaneously, in 1391, consumer price inflation reached 30.5 percent, according to the Central Bank of Iran (CBI).
However, the rapid increase in prices in the short-run also caused an expansion of construction investment. In the summer semester of 2013, investment in housing increased by a staggering 41 percent.
However, in the current Iranian year 1393, which started in March 2014, the housing market has slowed down remarkably. In the first semester of this year, investment increased by only 7 percent compared to the same period in 1392. Predictably, CBI data shows that the slowdown in price inflation adversely affects the initiation of new building projects. Construction firms tend to invest more in finishing near-finished projects, but put just-started projects on hold. In the summer semester of 2014, investment in near-finished and semi-finished buildings increased by 10 percent, while investment in new buildings decreased by 2 percent. The long average construction time of buildings in Tehran exacerbates the trend of ‘smart delays’. Additionally, price inflation and the issuance of new licenses have increasingly diverged (graph 1).
Demand, Supply Imbalance
Demand and supply have been out of tune since the amount of new projects lag markedly behind the flow of new entrants. 645,000 units are currently required to be built, mainly in Tehran, where most employment opportunities are found. Additionally, many families who cannot buy a house in Tehran province move to Karaj, about 40 kilometers to the west of Tehran in Alborz province. As a result of the recent slump, combined with the lack of housing, housing and rental transactions were up by 52 and 33 percent respectively in Q1 of 1392.
Turnover in Tehran housing market is thus high. But simultaneously, needed investment depends on surrealistically high price inflation, causing real investment to lag behind the required levels to satisfy demand. In other words, there is not enough incentive for private construction firms to invest in required amounts at sustainable prices. Several solutions have been offered to deal with this supply-side adversity.
A much-discussed report published last week by the ministry of road and urban development, delved into the most influential short- and long-run factors in the determination of housing prices in Tehran. The findings show that in the short-run, the housing price of the preceding period, the land price and the cost of building account for most price variations. In contrast, in the long-run the price of land and building costs are the prime determinant of house prices.
The report proposes removing the price of land in house price calculations by leasing state land to private contractors for very long-periods of time. Additionally, it proposes more efficient allocation of arid and unused land.
The government has so far not offered an inclusive plan to tackle the slump in construction investment. However, it has offered blueprints which have thus far not reached parliament. One plan would entail offering credit lines of up to 800 million rial (about $23,200) from which buyers could take out loans up to 80 percent of the value of their house. The ministry of roads and urban development has additionally proposed using this credit line to fund the construction of 100 to 300 thousand residential units annually.
Sale of ‘Density’
The Tehran City Council has also been severely affected by the drop in new building license applicants. The council depends for much of its income on selling licenses to the construction industry, and a policy called ‘Selling Density’. These costs are in turn reflected in the housing prices accounting for up to 22 percent of average building costs in Tehran. In response to the budget squeeze, the City Council plans to increase taxes on low rise buildings and further a differential tax policy on high rises in the north and south of Tehran. Donya-e Eqtesad daily estimates that this will bring municipal taxes to 30 percent of building costs.
Mehr Housing Project
Another issue is related to the controversial Mehr Housing Project, which is blamed, together with sanctions, for causing high inflation rates. Since the 10th administration, the housing industry moved towards the center of the economy, but also towards more corruption and fraud with start in 2007 of Mehr building project. The scheme was meant to provide low-cost housing to the 30 percent of poorest Iranians through the transfer of state land to contractors and the establishment of cheap credit lines, which analysts believe played an important role in the rapid expansion of liquidity in the economy and thus inflation.
The current administration’s push to finish the Mehr project, in which many buildings are unfinished, should be welcomed. Additionally, the ministry of road and urban development’s recent proposal deserves serious consideration. However, the results also show that building costs are an important element in the determination of house prices and City Council taxes take up a large chunk. Hence, the government should do its best to reduce building costs. While the Tehran City Council budget has many structural flaws and relies too much on generating its own revenues, the council could increase revenue by fighting ‘smart delays.’ Companies should not be allowed to unproductively claim urban space for years while construction projects are put on hold. The Tehran City Council should consider enacting heavy fines for such delays. Fines could diminish how building costs are reflected in house price and punish the firm, rather than the buyer.
Lastly, the government should also do more to prevent house vacancies. It is estimated that an astonishing 450,000 housing units are vacant in Tehran and neighboring Alborz province. The government has vowed to put a levy on vacant units. Although an important initiative, the program has so far failed to successfully register vacant homes and track their owners.
