Economy, Business And Markets

Time for Renovating Unresponsive Mortgage Market

Time for Renovating  Unresponsive Mortgage Market Time for Renovating  Unresponsive Mortgage Market

Recession has hit hard the real-estate market for two years now, pushing the government to end a seven-year ban on offering mortgages by commercial banks in May, allowing them to resume their mortgage operations—a move authorities hope would help stimulate the property market. Two months on from the announcement, however, no significant signal has been observed.  

The uncertainty caused by sanctions and lengthy nuclear talks between Iran and the six world powers were initially identified as the largest drag on the real-estate market, but now an expert is suggesting that the sanctions relief, which is expect to begin by 2016 after both sides reached a historic deal on July 14, will have no immediate impact on the housing sector.

Hossein Abdoh Tabrizi, a financial and housing expert, blames former president Mahmoud Ahmadinejad’s housing planning and low purchasing power of home seekers for the two-year recession.

In an exclusive interview with the Financial Tribune, Tabrizi praised the policy to boost the already-weak mortgage market but said it should have been addressed in a more serious way.

The finance professor and senior advisor to the minister of roads and urban development hoped Iranian banks and credit institutions, as major mortgage fund raisers, would grab the opportunity sanctions relief will offer. They need, the expert said, to be patient and start a process that could take a decade to reform their structure and improve their credibility.

 Bad Planning

Referring to the last years of Ahmadinejad’s era, Tabrizi criticized the previous administration’s housing planning as a failure, saying it ended up in a pile of “luxury housing units” for which there was no demand.

“Housing market has gone through deep changes. Housing stock has piled up and we’ve built, during the last three or four years of the Ahmadinejad’s era, a lot of luxury apartments and commercial areas—far above the level of demand,” he stated, blaming big lenders for the status quo.

Commercial banks allocated the great bulk of their loans to luxury housing developers, a move that led to the building of 1.6 million extra housing units in major cities.

“A part of the existing banking crisis is coming from this very specific sector,” he told the Financial Tribune, referring to $30 billion in toxic loans held jointly by commercial banks.

“Neither the policymaker nor the developers took into consideration the demand and the elasticity of the housing market at the time,” he said.

It is estimated that 400,000 to 600,000 luxury apartments are now vacant in Tehran alone. That means a “very huge overinvestment” has occurred in the housing sector for “quite a long period” without the administration supervising this wasteful process.  

Thousands of shops and commercial centers were built during the previous administration, according to the expert, which are too many to be absorbed by the struggling market in the next couple of years.

 Mortgage Market

Tabrizi rejected the claim that the new government’s scheme to boost the mortgage market would be inflationary, calling it a “bad theory”.

Inflation comes when you spend large amounts of money on a project for which there is no demand, he argued, which is not the case here as mortgage loans are set to reach the middle class and low-income home seekers.

“Houses are hard to be liquidated so their production cannot be inflationary,” he said, declaring the Iranian mortgage market as one of the “weakest” in the world.

“The mortgage to total price ratio in Iran is very low. We’re not even able to lend 10% of the value of a housing unit to the buyer,” he said. At the same time, however, “our banks give developers huge amounts of money in loan to build luxury apartments and commercial centers, without real demand in the market,” he added.

The Iranian housing sector needs to produce about one million housing units every year to meet the market demand, but potential buyers are mainly short of funds as savings of an average young couple living in major cities is hardly enough to afford a small house even if both partners have jobs, he said, laying emphasis on the need for a stronger mortgage market.

Tabrizi said the household to housing stock ratio was around 1.17 in the early years after the 1979 Islamic Revolution. That means for every 117 households there were 100 houses, he explained, adding that the ratio has now improved because growth rate of home construction has been faster than that of the population.

“Now we have 100 built houses for every 100 households but there are still millions of households seeking an affordable house,” he said, noting that the supply and demand structure changed in recent years.

“Demand has become more speculative these years. Speculators do not buy houses for personal use, but they purchase apartments for investment.”

To push housing speculators into a corner, he called on the government to stop supporting them. Instead, he suggested the government and commercial banks back the low-income households by providing mortgages and renovation loans.

“The mortgage market, if expanded sufficiently and properly, is well secured, the loans can be bundled into bonds or other mortgage-backed securities and offered in international markets,” he said.

“As the risk of mortgage market is low in Iran it would not be difficult to raise money for this [housing] sector through national and international markets. The only obstacle is the multiple foreign exchange rate system which needs to be sorted out by the central bank.”

 Price Change

Tabrizi predicted commercial unit prices to stall as there is still a bubble in this market.

“In real terms the prices of commercial units are going to fall further in the next five years,” he forecast. “It’s very difficult these days to sell a commercial unit, especially if the shops are built in big shopping centers in metropolitan areas.”

For the luxury houses, he said, the recession will persist for at least a couple of years. But as the price of land increases, luxury houses may see a price rise after two or three years, he added.

The expert, however, forecast a steady increase in prices of small houses in accordance with inflation. He argued that the middle class and lower-income people will continue to buy homes.

 Sanctions Relief

The former director of Tehran Stock Exchange (2003-5) hailed the lifting of sanctions as a “very good development” as it would affect both expectations in the short run and business performance in the long run. But he warned that sanctions relief is not going to sort out all structural problems the Iranian economy is facing, like double-digit inflation—now hovering at 15%—and low productivity.

The banking sector, which is the backbone of the Iranian economy, must be structurally reformed in accord with the gradual lifting of sanctions, he said.

“At the moment, banks are not capable of raising money. They cannot extend credit as much as Iranian industries need.

“No doubt the Iranian banks need restructuring, especially if they want to resume business at the international level. Their corresponding banks will ask them to be more disciplined. Their partners abroad would ask them to use better accounting standards. The accounting quality should be improved. So, for the next decade, we’ll witness some financial institutions being closed down and some others being merged. The financial institutions may expect more pressure from the central bank,” he said.

Tabrizi disagreed with those who believe the central bank has done little to organize the hundreds of uncertified credit institutions.

“We have had a change in general mood” now in the society that could help the regulator take more disciplinary measures against the banks and institutions violating regulations, he said.

Tabrizi also rejected the idea that credit companies are not banks.

“The institutions even have a checking system supervised by the central bank. The only difference between a credit institution and a bank is that the institution does not offer a current account. But they are actually operating as banks,” he said.

He said the central bank’s position should be reinforced, admitting that the regulator is now “weak” and being pushed around by many parliamentarians and government officials, a problem that needs to be fixed by giving the central bank more power.