Iran Housing Construction Trends Roiled by Currency Crisis

EghtesadOnline: New figures show that due to volatile currency fluctuations in recent months, which triggered steep price surges in the housing market and threatened the long-term outlook of the beleaguered housing sector by discouraging new construction.

News ID: ۷۴۶۱۰۶

14 October 2018

An analysis of data provided by the Central Bank of Iran shows that homebuilders across the country are refraining from starting new projects to meet the housing sector's future needs, the Persian economic newspaper Donya-e-Eqtesad reported.

They are accelerating the completion of existing projects to supply a market that has experienced massive price hikes in recent months and make quick profits.

Iran has been battling an ongoing currency crisis that started after the unilateral withdrawal of the US from Iran's nuclear deal with world powers, according to Financial Tribune.

CBI figures show that the volume of investments made to complete the construction of ongoing residential projects during the first quarter of the current fiscal year that ended on June 21 jumped by 53% compared with the similar period of the year before.

However, investments made to launch new construction projects increased by only 20%. This does not look bad on paper, but a completely different picture emerges once other aspects of the rise are analyzed.

Donya-e-Eqtesad also reviewed data provided by the Economic Policies Department of the central bank, which indicated that the number of newly started residential projects during this year's Q1 declined by 3% compared with the similar period of last year across the country.

This is while new residential projects had not increased notably last year either, having registered a small 3% hike compared with the fiscal 2016-17, when the housing sector was still mired in a five-year recession.

The two sets of CBI figures clearly indicate that during this year's Q1, the rising volume of housing investments has not equaled an increase in the future supply of housing since the increased rial investments were offset by rising construction costs.

Referring to prices in the fiscal 2016-17 as the basis of calculation that eliminated the effects of inflation, results show that the volume of housing construction investments during this year's Q1 declined by 2% year-on-year. The 20% increase in the volume of investments was largely due to inflation.

This is very alarming since it means an already embattled housing sector will face further supply shortages in the future.

> Critical Need for 550,000 New Homes p.a.

According to Donya-e-Eqtesad, a total of 326,000 residential units were built across Iran during the whole of the previous fiscal year. That was 40% lower than the critical need of the housing sector, which has been estimated at 550,000 residential units annually by government analyses.

This level of minimum housing requirements has been identified by surveys of the Comprehensive Housing Plan, which predicts housing supply by the turn of the Iranian century in 2021 must reach 900,000 units per year.

Housing supply between 2014-17 stood at 370,000 units per year, much lower than the critical minimum needs. The housing sector has failed to compensate, with the currency crisis further widening the gap.

Even as the number of construction permits issued across Iran's urban areas increased by 7.5% on an annual basis during this year's Q1, the actual number of constructed buildings fell by 3%. This number is a much better indicator for analyzing the situation since the number of permits does not equal the number of residential units referred to in the permits. Each permit usually leads to the construction of three units. On the other hand, the issuance of construction permits in one month or quarter does not mean that construction begins immediately.

The number of residential units built is the best indicator, but numbers for the first half of the current year have yet to be released. However, average numbers in previous years can guide future predictions.

According to Donya-e-Eqtesad, a look at CBI data shows that "conditions of the construction market at least during the first two months of the this year's summer have been such that the volume of future supply is unlikely to fare better during the second half of the year compared to the first half".

> Rising Construction Costs

A major factor contributing to this negative outlook is rising construction costs.

According to the report, the index of non-metal and metal construction materials grew by 28% and 59% respectively during this year's Q1 year-on-year. The index of construction services costs increased by 15% as well.

According to the secretary of the Association of Mass-builders, the cost of building each square meter of a residential unit stood at about 15 million rials (about $105) last year, whereas it did not go lower than 25 million rials ($174) this year.

"Even as more than 80% of construction materials are produced locally and there is no need to use imported items, the prices of same materials has surged and we are presently facing a shortage of some materials in the market," Farshid Pour-Hajat also told ILNA.

The official pointed out that service providers have upped their tariffs and municipalities have multiplied their toll fees.

For instance, he said, municipalities in metropolises like Tehran have increased their rates by tenfold year-on-year, and this cost is ultimately imposed on the final buyer of the residential unit.

The significant shortfall of housing supply across Iran only adds to concerns of a returning housing recession that increasingly seems inevitable. The ongoing currency crisis has meant that the general public is now considerably less capable of affording a home, causing a decline in housing deals nationwide.

A continued rise in construction costs and a declining supply chain only add insult to injury.