What is going on in Tehran’s property market? Would it be fair enough to claim that this once vibrant sector of the economy is finally out of the woods?
The Central Bank of Iran publishes monthly reports on the latest developments in the housing market in Tehran that is indeed a useful indicator of market conditions as the boom and bust of housing market is a rather local affair. According to the CBI, the housing market over the past two months has witnessed 4.4% increase in monthly sales.
CBI also publishes quarterly reports offering in-depth data on the property circuit, which has a six-month time lag. The latest report is not very promising. One oft referred figure is the sharp decline in the number of building permits issued, indicating a 36.2% drop in the quarter ending June 21, 2015 compared to the same period last year. Private sector investment in housing also declined by 17.1%, amounting to 45.8 trillion rials ($1.5 billion).
In the first case, the declining number of building permits and investment are causes for real concern as there will be less supply of houses in the coming years. Add to this, two consecutive months of increase in sales and you can easily see higher prices not far away, a perception that is a symptom of recovery.
A new CBI finding on housing market in the sprawling capital in the ninth month of the fiscal year (Nov 20-Dec 21, 2015), indicates an increase in sales by 4.8% compared to the previous month, still down by 2.8% compared to the similar period a year ago. According to the report, the average price per square meter of an apartment was 38.8 million rials ($1,055 based on market rates), indicating 1.2% decline compared to last year and 0.6% increase from a month earlier.
If we use these numbers to calculate the price elasticity of housing on monthly and yearly bases, we get 8 and 2.33 respectively. This means one percent increase in price of housing has led to 8% more sales in the month under consideration. While one percent decrease in price over a year has led to a 2.3% decline in sales. Furthermore, what is clear is that the demand for housing has decreased during the considered year, while it has increased in the month ending Dec 21, 2015. The increase in demand can be attributed to the almost doubling of the mortgage ceiling by banks from 350 million to 600 million rials.
According to the CBI’s report in the month before, the monthly price elasticity is -2.16. As for the given period, the volume of sales has also increased. The negative sign is that the increase in sales is due to lower prices amid an increase in supply. It is also believed that the increase in supply might also be due to changes in rentals and sellers’ reservation prices.
Rentals have had a slower growth rate and registered its lowest increase of 11.5% during the first nine months of the fiscal year (March 21 to Dec 21, 2015) as compared to the same period a year earlier. In the meantime, the inflation rate for this period was 14.3% while the interest rate for one year deposits is at least 20%. These conditions have adjusted reservation prices of homeowners as postponing sales do not make economic sense anymore. In other words, since rental profits are declining and there is a limited time when an apartment is considered as new, the depreciation cost is low and supply is on the upper side.
It is safe to assume that the supply of apartments is currently highly elastic as owners are selling at the highest price that the market can bear and any price increase caused by an increase in demand will lead to a higher change in supply of houses. This means if prices increase by 1%, then the number of houses on offer will increase by more than 1%. If and when this happens, there won’t be much of a price hike because demand pressure will be compensated by increase in supply. In short, the market, ceteris paribus, seems to be moving into the much-awaited times of higher sales with rather stable prices.
