Economy, Business And Markets

New Loan Package Focus on Construction

New Loan Package Focus on Construction New Loan Package Focus on Construction

An agreement was signed between the Association of Home Developers and the Ministry of Roads and Urban Development, which allows home builders to receive construction loans from commercial banks at a rate of 14% even if they lack sufficient bank deposits.

The loan package only targets construction in urban distressed areas that have remained unaffected by the massive wave of construction in central and northern districts of Tehran.

The initiative is the second phase of the housing stimulus program that seeks to prop up the depressed housing market.  

The Money and Credit Council, the highest policymaking body of the CBI, agreed last month that first-time buyers would receive a maximum 800 million rials ($24,000) in loan from any commercial bank in Tehran. If applicants live elsewhere, in the cities categorized as “large” or “other urban areas,” they may receive 600 million or 400 million rials ($18,000 or $12,000), respectively.

The latest phase of the stimulus package, however, is focusing on the supply side by supporting home builders. It is estimated that the rate of apartment construction would double, thanks to the new loan package.

According to Eghtesad News website, the current package will provide up to 300,000 loans worth from 300 million rials ($9,000) to 500 million rials ($15,000) for the renovation of distressed areas in all major cities.

 Cheap Loans

The government is paying its share by covering 10% of the lending rate in the form of subsidies.

Donya-e-Eghtesad newspaper reports that a $15,000 loan in this package is even more affordable than the $24,000 mortgage offered to first-time home buyers.

The buyer’s package requires that applicants living in Tehran and large cities to make a deposit of 400 million, 300 million and 200 million rials ($12,000, $9,000 and $6,000) in proportion to their loan size for at least a year to become eligible for receiving the loan. That is especially distressing for low- and middle-income households and would additionally mean that applicants should wait for as long as 12 months even if they decide to open a deposit right away.

But the package does away with all these drawbacks to support the cash-strapped developers. This would make the loans the most affordable ever made to stimulate supply. The construction market is in urgent need of a leg-up after a prolonged recession.  

Home construction in Tehran declined by 58% in 2014, meaning barely 400,000 new homes were built last fiscal year (ended March 20), while there is a need for building 700,000 homes annually.

 One Neighborhood at a Time

According to the deal, home builders are required to launch their construction projects in two ways: by participatory agreement to develop public lands or by partnership with private landowners. The renovation process takes place by singling out a neighborhood and rebuilding a section of that neighborhood. The length of the agreement is said to be two years but the central bank has indicated that it could be extended.

 If You Can’t Beat Them, Join Them

The agreement also marks the end of government’s meddling in the housing market and its alleged rivalry with developers and home builders.

Mohammad Saeed Izadi, a deputy minister of roads and urban development, has said the new policy of the government revolves around viewing home builders as not just “undertakers” but as effective forces in the market.

“The change in the role of the government from a meddler and an interventionist policymaker to a watchdog, which seeks to be part of the solution by devolving the affairs to a skilled group of builders, bases the cornerstone of the shift in strategies,” Izadi said.

Izadi hoped that the new outlook would lead to an enhanced quality of housing in future.