Supply Deficit Blamed for Home Price Hikes in Iran

EghtesadOnline: The dearth of supply is one of the reasons behind skyrocketing home prices in Iran, says Hossein Afshin, an official with Majlis Research Center.

News ID: ۷۴۷۵۴۴

15 June 2019

“The supply of homes has decreased by 50% over the past five years. However, there is no guarantee that the housing affordability problem will be solved, even if the government’s new initiative to help build 400,000 new homes proves to be successful,” he was quoted as saying by ILNA.

Afshin noted that from the fiscal 2006-7 to 2015-16, as many as 10.5 million homes were built in the country but only 2.5 million of them were handed over to the people.

“These figures suggest that 77% of new residential units were constructed with the aim of earning a profit,” Financial Tribune quoted him as saying.

The official believes that the newly-introduced capital gains tax (CGT) would help contain the rising home and rent prices.

On Saturday, Chairman of Majlis Economic Commission Mohammad Reza Pour-Ebrahimi announced that the parliament has approved the outlines of the CGT bill.

Capital Gain Tax to Curb Speculative Trading

The reason for putting forward this idea now is that speculative activities are increasing and yield huge profits, leading to the neglect of manufacturing and employment issues, a member of Majlis Economic Commission said.

"We [in the parliament] wish to provide the government with a new political leverage to manage its resources. Capital tax gain, which is a value added tax on the ratio of yields on purchases and sales, will help lower inequality and price fluctuations in the property sector," Rahim Zare' added.

Iran's housing sector has long been subject to speculative trading since prices have seldom remained stable. This has especially been the case since a currency crisis spurred by the unilateral US withdrawal from Iran's nuclear deal with world powers has led to significant property price hikes. Although most speculations and hedgings have materialized in the foreign exchange and gold markets in recent months, some have also opted for the housing market in their bid to protect or multiply their capital.

According to Zare', levying capital gain tax on property speculation is also expected to decrease the share of housing expenses in the overall basket of expenses of Iranian households.

"Globally, households spend 7% to 17% on housing, but this figure in our country is a minimum 35% and goes up to 80%," the MP said, adding that more than 50 countries currently levy capital gain taxes.

He did not explain how the measure could help lower housing expenses.

Zare’, who is a lawmaker, noted that land prices in the capital city Tehran had increased by 128 times in the fiscal 2015-16 compared to prices in 1992-93.

“Over the period, home prices jumped 88 times what they were and rents grew 106 times,” he said.

According to the official, genuine consumer demand for housing far outweighed speculative demand around the time of the Islamic Revolution, especially between 1976-77 and 1986-87 when consumer demand had an 80% share.

However, the equation was almost reversed between 2006-7 and 2016-17 when speculative demand accounted for a whopping 66% share of all property deals.

Zare' provided further insight into how worse Iranians have fared in the past few decades in terms of homeownership.

“If an average Iranian had saved one-third of their salary in 1992, they could purchase a home after an average of six years. That waiting period jumped to 10.3 years by 2015 and stands at an unbelievable 31 years at present,” he said.

"We wish to incentivize housing production through this initiative to boost supply, because speculation falls when supply rises. The yields from the capital gain tax initiative will be spent on production and support of the housing sector.”

Vahid Azizi, an economic expert, said speculators purchase a house only to sell within two months.

"Through exemptions that have been considered in the scheme, only a minority of housing deals—those being conducted with the aim of speculation—will be subject to it," he said.

Tehran Homes Prices Rise 71%

Figures provided by the Planning and Housing Economy Office of the Ministry of Roads and Urban Development show the average price of each square meter of a home in Iran's capital city, Tehran, stood at about 82.41 million rials ($629) in the last Iranian year that ended March 20, signaling a year-on-year surge of 71.1%.

This is while a total of 130,396 home deals were signed during the period under review, which account for 29.2% less deals compared with the preceding year, Mehr News Agency reported.