Economy, Business And Markets

Impact of Rate Cuts on Real Estate Market

Impact of Rate Cuts on Real Estate MarketImpact of Rate Cuts on Real Estate Market

Lower deposit rates will have an immediate effect on the real estate market pushing up demand and boosting investment in the key sector, an economist familiar with the market says.

“The lowering of interest rates on deposits by banks is a key game-changer in the real estate market, as it is expected to stoke demand. This sector is also expected to lure more investment,” quoted Ali Qaedi as saying.

However, he said, the surge in demand would not lift house prices, because “there are many vacant apartments in the market, which would help balance home prices.”

Pointing to Bank Maskan’s 800-million-rial ($26,000) mortgage loans, Qaedi said “financing homebuyers would also impact the market, since it would help increase their purchasing power.”

Even though home prices have not surged in recent years–thanks in large part to the lingering recession–most people still cannot afford to buy a house, especially in the big urban areas. Even though the mortgage rates are low by market standards, the monthly payments are still too high for fixed-wage earners.

Bank Maskan, the country’s main housing bank, launched the Housing Savings Account mortgages earlier this month. In the framework of a  stimulus package launched in June 2015, the account aims to provide first-time homebuyers with cheap loans. The scheme requires applicants to make an initial deposit and wait for a year to become eligible for the mortgages.

“The expected boom to the economy, as a result of the easing of sanctions, should also help improve the property market,” Qaedi said.

He expects the housing sector to improve in the current fiscal year that started in March, noting that the extent of price hikes and new investments highly depends on macroeconomic conditions and the level of the rate cuts.

Data from the Ministry of Roads and Urban Development shows that the number of home sales in Tehran rose to 15,192 by the end of the month that ended on May 20, marking a y/y increase of 7%. The average price of residential units in Tehran stood at 42.5 million rials ($1,390) per m2, up 4.4% compared to the same period last year.

 Impact on Rents

Meanwhile, high deposit rates in the past years (sometimes reaching as high as 28-30%) has encouraged the landlords to ask for bigger security deposits and  lower monthly rents. However, a series of rate cuts is set to make this trend a thing of the past.

“Lowering deposit rates to 15% will not go well with tenants, since landlords are expected to raise the rents,” Ahmadreza Sarhadi, a housing expert, told ISNA.

“Tenants will either opt for cheaper houses or will agree to pay rents they can barely afford,” he said, adding that an increase in lawsuits and legal wrangling could follow.  

The Urban Development Ministry shows that 11,730 homes were rented during the month ending in May 20, posting 11% growth compared with the same period last year. The number of rented homes also recorded a year-on-year growth of 2.7%.