To some Iranian economists and policymakers, housing construction is a major economic activity with large multiplier positive effects on economic growth.
Ali Sarzaeem, an economic expert, argues against this rationale.
As per Clause 18 of the 2021-22 Budget Law, banks are required to pay a total of 3,600 trillion rials ($15.6 billion) in loans from their internal resources for the construction of 1.2 million housing units in both urban and rural areas. Borrowers can take out a loan worth up to 3,000 million rials ($13,000), Fars News Agency reported.
“There are probably two assumptions made by people who advocate government-backed housing programs. First, real-estate prices will be kept in check by increasing the supply of homes and consequently, members of the public will see an improvement in economic welfare. Second, the boom in real-estate development will lead to significant growth in other economic sectors,” Sarzaeem said.
The translation of the article published in the Persian-language daily Donya-e-Eqtesad follows:
The second assumption is usually an important ingredient when it comes to the viability of such measures. Sadly, some economists have promoted this view for years and policymakers were more than willing to follow suit.
The basis of this argument is that because the housing sector avails itself of building materials such as steel and cement, its growth results in substantial overall growth in other sectors and the economy. Therefore, the idea that a clear route toward economic growth passes through investment in housing turned out to be increasingly attractive to policymakers because improving people’s welfare and the country’s competitiveness on international fronts is an arduous process.
Housing is a non-tradable commodity, unlike other products that people can ignore in favor of a non-local product in the absence of a favorable counterpart, but when it comes to buying a home, people don’t have the option of ditching low-quality, expensive homes for a non-local one.
That is why politicians believe that they can promote welfare by creating economic growth in the housing sector: it’s enough to exert considerable pressure on the banking system to dole out long-term construction and home loans at government-mandated lending rates. Then, the economy will land straight on the growth side.
That’s unfortunately not true. Public welfare is measured by the degree to which people can compete in global markets. A more competitive economy can produce commodities of higher qualities and cheaper prices, and consequently improve the wellbeing of its people.
Competition occurs on the side of tradable commodities. When an economy finds a footing in different markets, the overflow of its earnings finds its way into the market of non-tradable commodities like housing. But the opposite is not necessarily the case.
You can’t improve people’s power of competitiveness and welfare by improving their housing. In other words, the welfare resulting from housing does not lead to consumption of better commodities, but improvement in competitiveness can translate into housing welfare.
That the boom in housing leads to a boom in sectors such as steel and cement is also a dubious assumption. Putting pressure on improving housing often gives way to the government’s pricing of building materials and consequently renders these businesses unprofitable.
Many people and experts have formed big delusions about the real-estate market. They think the rise in home prices has resulted in a boom in the overall economy; whereas, the high value of assets in the country is indicative of the expansion of monetary sector. They assume that the country has gained a huge amount of capital that can be directed toward production, now that the home prices have gone ballistic. They must be reminded that for a property to turn into a capital, there must be both a seller and a buyer.
Studies indicate that the economic growth rate, which arises from investment in civil development projects involving housing, factories, roads and bridges is smaller than that generated from investment in machinery.
The country needs to place more importance on investment in machinery than housing, if it intends to register higher GDP rates.
Lastly, obliging banks to grant a bigger share of loans to the housing sector will be at the cost of industrial, services and trade sectors.
Those who have become entangled in the delusion of achieving growth in the housing sector need to prepare themselves to witness manufacturers struggle with financing challenges. There is no shortcut to development.
