Monday , 27 June 2022

Surging prices may push Iran’s housing sector back into recession

Al-Monitor  – Since January, Iran’s housing sector has been in a long-awaited boom phase after a five-year recession — the longest dip in recent memory. But now the sector is in danger of sliding back into negative ground due to the sudden and massive price hikes across the country spurred by the ongoing currency crisis.

The Iranian economy — including the rial — has taken a beating since US President Donald Trump unilaterally withdrew from the Joint Comprehensive Plan of Action in May. As the currency plunged, volatility also spread to other markets, including property, which has seen continuous price jumps in recent months.

Home prices in Tehran and across the country first started rising in August 2017, on the back of a decision made by the Central Bank of Iran to cap interest rates on bank deposits at 15%, driving some capital toward property. The decision helped an expected housing boom, which, by then, was showing itself in the form of a gradual increase in the number of property deals and a rise in the number of construction permits. The boom stemmed partly from government support in the form of cheap loans that boosted purchasing power against the backdrop of a then-calm currency market. It was also partly due to private sector builders that invested more in the sector after lobbying to eliminate regulations that made the issuance of construction permits difficult. But house prices started growing much more notably at the beginning of the current Iranian year in March, due to inflationary effects caused by currency unrest, with the capital — which usually accounts for roughly half of property deals in the country — seeing the biggest hike.

Yet, according to the latest central bank data, Tehran’s housing market only saw deals involving 12,006 residential units during the fifth month of the current Iranian year that ended Aug. 22, signaling a year-on-year decline of 33.2%. This is while the average price of each square meter of a home in the city showed a whopping 62.1% annual surge. The trend of falling home deals, coupled with surging prices, has gone on in Tehran for three months now as the city saw the number of residential property deals dwindle by 7% and 3.1% during the fourth and third Iranian months respectively, while prices went up by 54.2% and 45%. Looking at the broader trend during the first five months of the current Iranian year as a whole, the number of residential unit deals has declined by 7.3% while prices have increased by 45.5%.

Experts and officials have warned that should the rial continue to depreciate, leading to persistent price hikes, the housing sector will once again be mired in recession. Hesam Oqbaei, deputy head of the Tehran Association of Realtors, recently said, “The housing market can no longer take price surges.” But others believe that in spite of the price hikes, the housing market — mostly in small cities — is still behind inflation and will therefore remain on its current downward trajectory. “If the country’s conditions reach a degree of stability, then a portion of the capital will move toward the housing sector and make up for its [price] gap with the inflation rate, but we will still witness a deterring effect from the demand side if that doesn’t happen,” said ​Hassan Mohtasham, a board member of the Association of Mass Builders.

Rising home prices have already pushed many residents out of Tehran and other major cities, while those who have stayed are facing increasingly challenging conditions.

Tehran resident Homa, 26, lives in a 50-square-meter apartment that she says her father purchased as a contingency a few years ago. “I’m so glad he did that because I would virtually have no way of buying a house for myself even if I worked extremely well, spent nothing on myself and saved everything for the rest of my life,” she told Al-Monitor.

Just last year, she was thinking of saving money with her partner to sell the apartment, which they spent months renovating, and move to a slightly better district. “Now, firstly I don’t even think we can save anything in the current economic situation and even if we could, there is no way that we will able to cover the about 100 million tomans ($23,809) that has been added to the price of the house we wanted to buy,” she said. “How much has our income gone up in the same period? Less than 2 million tomans ($476) a month.”

Those who have not yet been pushed out of the capital may end up having to move to its poorer southern districts, many of which are classified as distressed urban areas. Indeed, price differences between northern and southern Tehran are massive. While the average price of each square meter of a home in all of Tehran stood at 74 million rials ($1,762) during the fifth month of the current Iranian year, the equivalent figure in the affluent northern District 1 was 157.6 million rials ($3,752) while the southern District 18 registered an average of 31.1 million rials ($740). Those numbers were up by 59.3% and 37.4% year-on-year, respectively.

Rents have jumped as well, creating many distraught tenants. “We’re already struggling with the current 4 million tomans ($952) a month we have to pay for rent. I can only dread what will happen next year,” said Aria, 34, who lives with his mother and disabled father.

While high-ranking officials, including the minister of roads and urban development, have maintained that rents must only rise to the tune of 10% each year, they have increased by at least 50% in recent months. Yet it is not possible to legally tell landlords not to jack up prices. This has indeed happened with many desperate tenants in major urban centers. To address the situation, the Cabinet has submitted a bill to parliament that envisions two-year tenancy agreements with annual rent increases legally capped at 10%. But there are many kinks to work out and many people are sure to suffer until — and if — the bill is signed into law, let alone implemented.

For now, provincial centers and smaller cities — especially those with populations of under 200,000 — seem to be the last line of defense against the return of a nationwide housing recession. Indeed, a recent study has shown that amid the decline in residential property deals in places like Tehran, smaller urban centers have registered an uptick. Prices have also increased much less in smaller towns and cities, attracting first-time buyers. Yet there is no doubt that current conditions are unsustainable and will drive the housing sector toward another period of stagnancy that may again prove difficult to exit.

Maziar Motamedi is an Iranian financial journalist based in Tehran. He covers Iran’s banks, the foreign exchange market, insurance, financial tech and housing.