Housing Sector Recovery Linked to Ancillary Factors

EghtesadOnline: The Ministry of Roads and Urban Development is upbeat about buttressing the signs of recovery in Iran’s housing sector during the current fiscal year (started March 21), but also concedes that there are a number of things that could go wrong.

News ID: ۷۴۵۲۶۵

07 May 2018

“Even as predictions for the housing market this year signal a rising trajectory for various indicators, including the volume of home deals and prices, construction investments, the volume of growth for each of these indicators is under the influence of several internal and external parameters, especially macroeconomic indicators, that will exert an influence,” Ali Chegini, the head of Planning and Housing Economy Office at the ministry, said.

He also told HIBNA, the news portal of Bank Maskan—the agent bank of the housing sector, that inflation, bank interest rates, GDP growth and home applicants’ purchasing power are the most important factors that will drive Iran’s housing sector recovery from a five-year recession.

Chegini also referred to various developments and volatilities in parallel markets, especially the foreign exchange and gold markets, as the most significant factors that have already affected the housing market this year, Financial Tribune reported.

“Even as this effect has been psychological, it will affect variables of the housing sector indirectly in the medium and long run,” he said.

The Iranian government on April 10 implemented a unified foreign exchange rate regime and declared transactions at other rates as “smuggling” as it set the rate of the US dollar at 42,000 rials.

However, black market rates have continued to climb stratospherically and the greenback is set at an all-time of 65,000 rials days before US President Donald Trump is to announce his stance regarding Iran’s nuclear deal.

But as access to hard currency has become increasingly difficult, the rise in gold demand and prices has been even more accentuated than foreign currencies. Each benchmark Bahar Azadi gold coin was traded for an all-time high of around 22 million rials ($520) in Tehran on Sunday.

According to Chegini, rising foreign exchange rates can not only absorb capital that could potentially enter the housing sector, but can increase the prices of construction materials by boosting inflation expectations.

“These factors have been shaped by inflation expectations and rising construction costs can ultimately increase the final costs and sales prices of residential units that will in turn form inflation in the housing market,” he said.

As the housing market is currently seeing more real demand and less speculative activities, he added, any such unusual increase in prices will drive away applicants when their purchasing powers decline.

If that happens, the official believes the final result will be fewer home deals and a weaker growth trajectory for the housing sector.

“Foreign exchange fluctuations in the final months of the previous year and the early months of this year led to a decline in the volume of home deals and weakened the market’s rising trajectory,” he said.

“One of the reasons was that some investors and builders refrained from offering ready-to-sell residential units in the hope of seeing a price hike.”

Referring to bank interest and foreign exchange rates as the two most important influential factors, Chegini predicted good tidings for the housing sector if the government manages to successfully implement its policy of taming unruly foreign exchange rates and reducing bank interest rates that are currently set at 15%, but effectively stand at 20%.

The latter rate was offered a few months ago for a limited period in response to foreign exchange volatility and persisted through bonds offered at the same rate.