The latest data provided by ministry of roads and urban development shows about 51% decline in the volume of construction projects in the current Iranian year (started March 21). The real estate market is also experiencing a downtrend as there have been no big changes in the number of transactions recently. Whether or not there will be a boom in construction and real estate projects before the end of this year depends on multiple factors inside and outside of the housing industry as well as on the outcome of nuclear talks between Iran and the P5+1 (the five permanent members of the UN Security Council and Germany), says the former director general of housing research and economic planning center, Mahmoud Jahani.
“Any boom or recession in the housing sector depends on the number of real estate transactions,” he said, adding that the drop in number of real estate projects in the current year is seen as a result of the low volume of real estate transactions in the previous year, which led to authorization of fewer construction permits by the housing ministry officials.
A review of the new data shows that the number of real estate transactions in the first half of the current year (March 21-September 22) was slightly higher than the similar period last year. Therefore, experts predict the number to increase in the second half of the year, creating a steady boom in the real estate market. But whether the uptrend will be enough to end the recession currently eclipsing the real estate market depends on other factors, Jahani stated.
Absolute growth and relative growth are terms used by economic planners in the housing sector to define the state of the real estate market. An absolute growth, Jahani explains, occurs when the average number of monthly real estate transactions exceeds 20,000. The number sinks to about one third whenever the market is experiencing recession, he added. “If the real estate market observes a relative growth in the final quarter of this year (December 2014-March 2015), about 15,000 to 20,000 monthly transactions will be recorded in the housing market during this period,” he projected.
The real estate market is influenced by factors that directly affect the demand side. These factors are functions of the volume of demand for housing and households’ purchasing power. In addition, banking facilities and government funding can help boost demand in the real estate market. But these factors often take a long time to change the market trend and are themselves affected by multiple external factors.
The external factors affecting the real estate market include excess liquidity, ratio of real estate prices to alternative fixed assets, inflation expectations, economic condition, and job market status, among others.
Excess liquidity, an important factor affecting the real estate market, is affected by the volume of oil revenue and government’s ability to dampen the destructive effects by tapping liquidity through increasing investment and issuing bonds, according to Jahani.
Inflation expectations can adversely affect buyers’ decision to invest in real estate, which could lead to the formation of a real estate bubble. “This can be prevented if the current efforts by the government to resolve the nuclear dispute with the West results in the removal of sanctions, helping to improve the business environment,” Jahani stated, adding that an improvement of the business environment would subsequently boost the gross domestic product (GDP) and, thus, reduces the possibility of a real estate bubble.
Another positive outcome of a ‘permanent’ nuclear deal would be a surge in the stock market, which would tap some of the excess liquidity in the market, resulting in a reduction of inflation. On the other hand, a failure to reach a final nuclear agreement could lead to stagnation in various economic activities and would accelerate the real estate crisis, Jahani said.
Jahani predicted that the volume of real estate transactions could hike in the coming months. “The outcome of nuclear talks can decide whether the real estate market would recover in the beginning of next year,” he concluded.
