Economy, Domestic Economy
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Housing in Need of Proper Financing

Housing in Need of  Proper Financing Housing in Need of  Proper Financing

The government faces an enormous challenge in providing the housing sector with the required finances to complete the semi-finished and new projects. The sector currently relies financially on banks and the capital market.

“Presently, the government’s most imminent problem regarding the housing sector is how to finance the existing projects,” minister of roads and urban development said.

The Rouhani administration, through its plan of action to exit recession, has sought to take the country out of financial predicaments. The plan calls for an increase in financial resources with the help of banks and the capital market.

“The administration has proposed a 12.5-fold increase in the banks’ financial resources,” Abbas Akhundi said. “The banks will be able to pay up to 1,250 trillion rials in loans if the projects are approved by the parliament”.

In order to help finance the housing projects nationwide -- using the capital market’s financial resources, the government has put forward the idea of forming various housing funds and issuing Islamic contracts.

The first housing fund was founded earlier this month, in the form of a joint venture by the ministry of roads and urban development, the Central Bank of Iran (CBI), and several of the country’s big banks.

The fund will grant housing loans of up to 50 percent of the actual value of a house to the applicants, combining the average incomers’ deposits and funding provided by the government.

A household should deposit 260 million rials for a year into this fund to be included in the process of buying a house. The fund would provide them with facilities with an average value of 600 million rials and a cap of 800 million rials with a 14 percent interest rate.

Officials believe that, considering the high inflation rate in Iran, the move would be an optimal solution to help the housing sector to flourish. It is also expected to enable a larger portion of the population to buy a house.

The newly established fund will increase the purchasing power of the applicants and will also improve construction standards,” the minister added.

“There should be a balance between supply and demand. An excess demand ends in inflation and excess supply leaves average incomers with no houses”.

“The housing fund is expected to effectively stimulate demand and supply at a balanced rate, Akhundi said.  

 Criticizing the Housing Fund

Discussing the practicality and efficiency of the newly established housing fund, critics bring up two main issues:

Firstly, the government has projected the allocation of about 100,000 housing loans to the applicants, while the number of applicants has already reached about 300,000. Secondly, the interest rate of 14 percent seems rather low -- taking into account that the nominal rate of housing bonds in the over-the-counter market (Fara Bourse) is 16 percent and the real rate - final price including commissions – stands at 28 percent.

Accordingly, the new housing fund will probably introduce a fake demand to the housing market and will put the rich besides the average incomers in the same line to receive the loans.

On the other hand, the low interest rate will stimulate speculators to take the advantage of the difference between the nominal rate and the real rate of the housing bonds offered for trading at Fara Bourse.

The critics also argue that an increase in the amount of housing loans from 350 million rials to 800 million rials will lead to corruption.  

 Recession Persists in Real Estate Market

The recession in the housing sector is expected to persist until the end of the year (ending March 2015), according to the head of the Iranian Society of Consulting Engineers, ISNA reported.

Ataollah Ayatollahi predicted that the government’s move to increase the current housing loan ceiling up to 800 million rials ($21,000) will not be effective unless people turn to purchasing smaller, less expensive units in towns, not in big cities.

The program was jointly introduced by the ministry of roads and urban development and the central bank to provide citizens with 50 percent of the price of a housing unit.

Although the loan can hardly help the residents of Tehran and other large urban areas to buy a proper apartment, Ayatollahi added that the plan should become operational.

The total number of empty housing units in Tehran province and neighboring Alborz province is estimated to be around 450,000. The government says it is taking measures to identify such units to levy a tax on the owners of the vacant homes -- an effort that officials hope would release more properties in the market. This, however, has not yet become a practical option, Ayatollahi said.

“As there is lack of liquidity in the market and economic prosperity seems to be out of reach, the real estate sector would most probably remain in recession,” he said. “Market analyses suggest that price hikes will be unlikely before the end of the year.”

 Rent Prices Keep Rising

Despite all the efforts to provide homes for everyone, Iran’s capital is still gripped by high rent prices.

For an ordinary Tehrani, finding a suitable home in the city is often a test of physical and mental endurance. Rapid urbanization, high demand, inflation, and sanctions have all contributed to the recent surge in rent prices.

Last June, a report by the Statistical Center of Iran said that rent prices in Iran have increased dramatically over the past decade. The report added that prices of pre-built homes have tripled during the same period.

 

Financialtribune.com