The state of housing production and supply in the new Iranian year (started March 21) can be studied from different aspects.
In Iran, the private sector is the main producer of housing. But at certain junctures, the government carried out housing plans to narrow the gap between supply and demand for low-income groups. Over the past two decades, two large-scale national projects, namely the Mehr Housing Project and the National Housing Initiative, were launched.
Before these projects, some small-scale housing supply plans were carried out. However, the overall outcome was not very satisfactory and the housing problem has worsened by the day, increasing the gap between the purchasing power of households and the price of housing.
Mohammad Mortezavi, the head of Iran Mass Housing Builders Association, prefaced his write-up for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
Now that the construction market in Iran is in deep recession and the biggest government housing project has been launched in different cities, it is necessary to focus on the housing markets of the private sector and the government in the new Iranian year [started March 21].
Where the private sector is in charge of housing construction and production, the continuation of recession and inflation is highly likely. Unfortunately, over the past few years, we have seen a decline in investment and production in the housing sector for obvious reasons.
Tied to Overall Macroeconomic Environment
Each small change in construction, production and investment in this sector is not isolated from the macroeconomic environment of the country; in fact, it is directly affected by it.
In a situation where builders, like other producers, are struggling with economic restrictions resulting from the increase in economic and non-economic risks, high inflation and the lack of support from policymakers, it is natural that the inflationary recession is impeding their activities.
The increase in the end price of construction following the rise in costs and inflation in construction inputs, including land, materials and wages, has imposed an appalling inflation on the housing and construction sector.
As the Iranian economy shrinks by the day, it’s natural that housing production will follow suit and give rise to anomalies in the construction market and housing transactions. The decline in construction and lack of new homes reinforces demand and it becomes a prelude to multiple and consecutive jumps in prices. The decision-makers need to heed the warnings and regulate macroeconomic policies and housing economy.
Giving support to housing production, providing facilities and controlling inflation in the construction materials market, which are envisioned in the Housing Production Surge Law, should be taken into account by the government to provide a favorable environment for investors in the private sector. On the other hand, improving the business environment and macroeconomic variables, especially by reducing inflationary risks and expectations, as well as curbing inflation, are essential for both the supply side and the demand side.
Gov’t-Sponsored Projects
When it comes to government-sponsored housing projects, the conditions are not any better. It is more than a year now since the government started the National Housing Initiative; the parliament has also approved a law in this regard called the Housing Production Surge Law, according to which new capacities in housing production for low-income groups and those in need of support will be created.
One million residential units should be built according to the needs of these people annually for four consecutive years, i.e., a total of four million homes. Almost a year and a half into this project, not much success has been achieved.
The most important reason for this failure is that the costs of construction of these units were far from the government’s expectation. On the other hand, the sums determined as the contribution of the applicants do not match the income level and the financial and economic ability of households; there is a glaring gap between these numbers and the financial ability of households. In fact, you can say that the government set unconventional figures as the cost of building units. Real-estate developers did not welcome the move and in doing so, the execution of these projects fell behind schedule.
These projects suffered several bouts of inflation, and recently, the high cost of building materials and the rise in wages have further disappointed the people. Registrations for the National Housing Initiative were lower-than-expected. Estimates show that applicants are less than 30% of the overall goal of the plan, indicating that people cannot become a homeowner under this plan, hence their low participation in the project.
Recession to Stay
In both the government-sponsored housing sector and the private sector, the recession will continue in the new Iranian year and we will see a downtrend in production. The fact is that we have lost a large part of the consumer demand in the housing market, as applicants have been pushed out of the market due to the widening gap between purchasing power and prices.
With the chronic inflation imposed on the construction sector in the last two years, an inflationary atmosphere has been created. A group of speculators has emerged in the real-estate market; they buy homes with the aim of selling them at higher prices.
In the absence of consumer demand, the statistics on real-estate transactions are still far from the normal years. That’s why deals and demand are not actually real. They are speculative and cannot lend motivation to builders to increase their activities in the construction market. In fact, this level of transactions is not enough to normalize the market in terms of capital circulation for builders. They will be motivated to return to the market only when they see a sufficient level of effective consumer demand and when they are able to estimate the final costs of construction.
To end this inflationary recession in the construction market, the policymaker has no choice but to devise a set of informed policies and strategies, the most important of which is curbing the prevailing inflation, controlling local currency depreciations and reducing economic and non-economic risks. Only then we can expect the problems to end, the construction sector to rebound and many other related industries to activate.
Under the current circumstances and with current approaches, we cannot expect a favorable situation in the new Iranian year and even in subsequent years in the Iranian economy, especially the housing and construction market.
