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Housing Recession Revisited
Economy, Business And Markets

Housing Recession Revisited

The recession visiting the housing market is showing no sign of easing despite the best efforts of the government.  The key sector is suffering its worst stagnation in a quarter century due largely to the economic slowdown in recent years.
The Office for Planning and Housing Economy of the Ministry of Roads and Urban Development has released a report sifting through the ills of the property market and the contributing factors. It lists several reasons and tries to explain why the painful recession has persisted for so long.
According to the report, published by the Persian-language economic daily Donyay-e-Eqtesad, the most important reason behind the recession is the entry of unprofessional but powerful players in the property market.
“The banks and other powerful organizations are largely responsible for precipitating the current housing market crisis. Through rent-seeking activities, these organizations have infiltrated the real estate market. Their huge financial clout and connections have disrupted market mechanisms and make healthy competition almost impossible,” the report argues.
According to the study, a good part of the new housing units in 2011-2012 were built by these organizations. A whopping 769,000 homes were built in the two years, while the total number of units constructed between 2006 and 2010, amounted to 600,000.
A majority of these units are luxury apartments or homes over and above 80 square meters that are unaffordable for the lower and middle-income strata, according to the report. “A huge gap between what the builders offered and what the average homebuyer could afford has resulted in the extended recession.”
The research showed that the two key variables indicating the trade cycles of the housing sector have been at their lowest levels in the past two and a half years. The index related to “investment in the construction of new housing units” is negative for two years in a row. The other index related to the “increase in added value of the housing units” plummeted to -2%.
Another factor behind the recession is “government policies aimed at curbing inflation and liquidity growth” according to the report. Disinflationary policies by the government have dampened investment in real estate, but at the same time “limited the range of price fluctuations of housing units.”
“However, taming inflation and stanching liquidity growth is positive in the long run as it leads to more real prices while transforming housing into a consumer good and not an investment option.”
Official data says inflation now is hovering around 15%, down from the 40% when Hassan Rouhani took office in the summer of 2013.
The third culprit behind the decline in the housing sector is the high interest rates, and more specifically deposit rates.
“Bank deposit rates are at their highest level since 1992. This has hurt investment in the real economy like housing construction,” the report suggests. Also the gap between the inflation rate and interest rates has made banks unwilling to offer “cheap, long-term mortgages.”
CBI’s Money and Credit Council voted to bring down deposit rates by two percentage points in April to 20% to help boost business lending. MCC members have hinted that further cuts are in the pipeline and could be announced soon.
The fourth important factor mentioned in the report has to do with “lack of flexibility in financial and monetary policymaking.”  The report notes that good and timely policymaking in line with the realities of the housing market is usually absent.
Sloth  in raising the housing loan ceiling or the failure to introduce real estate leasing or a secondary mortgage market in the past two years are seen as failures of the government to come up with workable policies in the housing sector.  
The last factor(s) is weak economic growth coupled with the disaster in the international price of oil, deep holes in the government budget and the systemic decline in purchasing power of most Iranians.

  Suggestions
At the end the authors offer three proposals to help revive the recession-hit housing sector.
First is pushing for regulations which prohibit non-professional organizations from entering the housing construction market and extra taxes on such organizations to discourage them from entering this sector.
The second proposal urges the government to sustain its anti-inflationary policies and check liquidity growth. “These policies help control the range of housing price fluctuations.”
The third and last proposal calls on the policymakers to be more flexible in setting and revising monetary policies in tandem with changing realities of the housing market to be able to keep pace with one of the most important industries in the country.

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