Economy, Business And Markets
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Housing Market’s Chicken-and-Egg Dilemma

Finance Desk
Housing Market’s  Chicken-and-Egg  Dilemma Housing Market’s  Chicken-and-Egg  Dilemma

The housing market is in the middle of one its worst recessions in recent history. The slowdown in home sales that began in 2013 has persisted without respite, prompting some to liken it to a depression-ravaged sector.

The severity of the housing crisis cannot be exaggerated given its quintessential status in Iran's economy. It is said that the housing sector is--either directly or indirectly--fueling 300 industries, affecting approximately 1,200 careers, according to Hesam Oqbaei, head of Tehran Association of Realtors.

The stagnation entails both residential and commercial real estate which is a big economic concern. The latest figures point to a rather dramatic situation. Home sales in the first quarter of the current Iranian year (began March 21) marked a 20% decline year-on-year. It is hard to find a positive side to such a consecutive decrease in demand in an important component of our economic health.

The current and former governments have carried out a series of initiatives to prop up the stagnant housing sector but with little success.

The Mehr Housing Project–the flagship legacy of former president Mahmoud Ahmadinejad--was a large-scale construction program initiated in 2007 to provide two million low-income people  with housing units through free land and cheap credits, but the nationwide scheme slowed down due to lack of funding. The project has also been slammed for its role in stoking inflation.

House prices increased by 220% from June 2005, when the former president first took office till June 2013. The cost of renting an average apartment in urban areas rose by 254% during the same period and property value in urban areas grew by 81%.

The increase in mortgage ceiling pushed forward by President Hassan Rouhani's administration in May which also ended a seven-year ban on offering mortgages by commercial banks other than Bank Maskan—the housing bank was similarly doomed even before it started. The loans that are offered barely cover 25% of the average home prices in big cities like Tehran. Its insufficiency is borne out by the lukewarm reception it has gotten from depositors willing to invest in the one-year mortgage savings account.

So, if the aforementioned stimuli have been largely futile, where is the road to recovery?  The answers should lie beyond the housing sector and into the macroeconomic realities of the country.

The famous saying that "it's the economy stupid" can actually be relevant here. It's a well-known fact that Iran's economy has been suffering from a severe recession perpetrated by nuclear sanctions and macroeconomic mismanagement in the eight years to 2013.

Although early positive signs have surfaced, a full-blown economic recovery has yet to take place. Masoud Nili, a top presidential advisor, recently compared the debt-stricken Greek economy to the sorry state of affairs in Iran, warning that the latter suffers from more complicated and deep-seated problems.   

In groundbreaking remarks, Nili went on to present the country with two stark choices: either to settle for a "self-absorbed, foreign-dependant" economy, which heavily relies on oil exports for income or embrace a "self-reliant, investment-friendly" economy, which thrives on non-oil exports and a vibrant tourism industry.

It seems to be a bit of the "chicken or egg" situation. Which comes first, a better housing market to help the economy, or a better economy to stimulate the housing market? While both of them could be happening at the same time, it should be noted there can be no real boom without public confidence in the economy.  

At a time when youth unemployment stands at 21% and wage growth has stalled, it would be premature to expect the chilly real-estate market to warm up by itself.

While there is need for change in monetary policies to help bring back homebuyers to the market, which should precede a series of reforms, including banking revisions. Banks have contributed to the housing crisis by encroaching upon the real-estate market. They need to surrender the ground to its rightful owners--the free market.

Although the effect of sanctions relief on the housing market has been downplayed, the windows it could open toward realizing a "self-reliant, investment-friendly" economy cannot be denied.

A good start, then, could be a surge in new home constructions for households belonging to lower income deciles, something that the current administration has already envisaged. When workers make good money and spend it, the cycle will gradually stimulate consumer sentiment in the housing market. In other words, if we make a good chicken out of the economy, chances there are it will lay some golden eggs in the housing sector, too.

 

Financialtribune.com