Economy, Business And Markets

Cautious Support for Mortgage Decision

Cautious Support for Mortgage DecisionCautious Support for Mortgage Decision

Experts believe the housing market, hit by the recession over the past two years, will eventually receive an impetus, as the Money and Credit Council raised the mortgage ceiling on May 19.

According to the approvals of the council, mortgage ceiling in Tehran would increase to 800 million rials ($27,000 at official exchange rate) for first time buyers and to 600 million rials for others. The amount of housing loans in other cities would also increase. Moreover, all private and state-owned banks are now free to grant home loans, in addition to the traditional mortgage provider Bank Maskan.

Deputy Minister of Roads and Urban Development Hamed Mazaherian hailed the council’s decision as a move that could help improve the purchasing power and pull the economy out of recession, IRNA reported. “As the loan granting process would occur gradually, housing deficit is not expected since supply would rise in line with demand,” the official said, explaining that the constructors would now be encouraged to complete unfinished projects and respond to the rising demand.

Mostafa Behzadfar, a faculty member in the University of Science and Technology, believes the government policy would prevent more decline in the construction sector, which he believes is the main cause of the recession. “Both the population increase (up to March 2001) and urban migration growth doubled the importance of construction in big cities, but rent-seeking in the market led to the surplus of supply and imbalance in the market, a phenomenon that further worsened by the population decline which started in 2005,” news website Banker quoted him as saying.

The expert believes the increase of home loan ceilings would trigger demand only if constructors focus on quality rather than quantity, arguing that the new decision would cause temporary price rise in the short-run due to physiological reasons while it would also help the market reach long-term equilibrium.

Moreover, the head of Tehran Real Estate Union, Hesam Oghbaei believes that the number of deals would hike following the MCC’s directive as it would help improve the buyers’ purchasing power.

However, he expects no price shock in the market, saying that the loan increase would boost the deals on small-sized apartments in towns rather than big cities as it can cover a relatively bigger share of house prices in such areas.

The ceiling on housing loans in major cities and towns is set to increase to 500 million rials and 40 million rials, respectively.

According to the Statistical Center of Iran, the housing investment had a 4-10 percent share of gross domestic product in the past few years, with households allocating 30 percent of their spending on housing. Increase in housing prices in recent years hurt demand, leading to a sharp decline in construction.