Nat’l Price-to-Rent Ratio Increases to All-Time High

EghtesadOnline: The gap between the cost of buying and renting is now at its highest level in Iran.

News ID: ۷۵۰۴۸۵

21 July 2020

The analytical report by the Persian economic newspaper, Donya-e-Eqtesad, using the Statistical Center of Iran’s data, shows that the national price-to-rent ratio settled at 29 in the fourth quarter of the last Iranian year (Dec. 22, 2019-March 19).

In the year ending March 2017, when Iran’s housing market was relatively stable, i.e., it did not experience a sudden and large price movement or recession, the index stood at 16.

The price-to-rent ratio is the ratio of home prices to annualized rent in a given location, which is used as a benchmark for estimating whether it is cheaper to rent or own property.

A price-to-rent ratio of 1 to 15 indicates it is much better to purchase instead of renting; a price-to-rent ratio of 16 to 20 indicates it is better to rent than buy, and a price-to-rent ratio of 21 or more indicates it is much better to rent than buy.

As a general rule, a lower price-to-rent ratio means conditions are more favorable for buying a home whereas a higher price-to-rent ratio means conditions are better for renting.

The specific thresholds of price-to-rent index are as follows: a price-to-rent ratio of 1 to 15 indicates that buying is more favorable, a ratio of 16 to 20 indicates that renting is typically more favorable and a ratio of 21 or more indicates that renting is more favorable.

The price-to-rent ratio reached 25 in Tehran compared with 30 in Tabriz; 50 in Isfahan; 25 in Karaj; 26 in Mashhad; 21 in Ahvaz; 34 in Shiraz and 32 in Qom in the fourth quarter of last year.

Vital Deductions

Several vital deductions can be drawn from these data:

First, given the fact that price-to-rent ratios rise and fall as the housing market heats or cools, the real-estate market in large provincial capital cities shows, in terms of value, higher growth rates in Q4 than in Tehran.

Second, the increase in rents has been higher in Tehran than in other major Iranian cities.

These data can also provide an answer to the question concerning the dearth of supply in Iran’s housing market: Over the past two years, much of residential properties purchased by investors were not offered on the market due to the decline in profitability.

Under normal conditions, the return on investment on rental properties is between 4-7% and even a good 10% in some years. But today rental property ROI has declined to 3%, which tends to discourage landlords from renting their homes.

Notably, the price-to-rent ratio compares the economics of buying versus renting, but not the affordability. If home prices are out of reach for most people in a specific market, then their only option will be to rent, regardless of whether the price-to-rent ratio is high or low.

The rental market in Iran can be described as a dead-end. On the one hand, rental affordability is at lower levels than current rents and on the other, homeowners are disheartened by the decrease in rental property ROI.

Empty Home Tax

The whole thing has urged policymakers to design vacancy tax to motivate homeowners to either sell or rent their unoccupied units.

A motion to consider the adoption of a vacancy tax was originally passed in the Iranian year ending March 2016.

The Ministry of Roads and Urban Development was then tasked with designing, in cooperation with a number of other affiliated organizations and entities, a database containing information on all residential units and homeowners across the country and handed it to the tax administration.

The ministry did not provide an exact date on which the database would be in use because “it must be strengthened and completed step by step so that its result can become more accurate gradually”, Ali Chegini, former deputy minister, said then.

Two months ago, Roads and Urban Development Minister Mohammad Eslami said the nationwide online database of all residential properties across the country had been completed and submitted to the Iranian National Tax Administration; the tax authority would issue tax statements as of the beginning of summer (June 21, 2020).

However, latest developments indicate that vacancy tax won’t be implemented any time sooner than August 22. Homes with floor areas below 150 meters will be exempt from empty home tax, though small-sized residential properties account for a big portion of vacant homes.

“Empty homes will not be taxed in the first year but they will be subject to tax at the rate of 50% of the property’s assessed rent in the second year and in the third year, they will be levied tax at the rate of 100% of the property’s assessed rent. A commission comprising officials with the Roads and Urban Development Ministry, INTA and Municipalities Organization will estimate the rent of properties,” INTA chief Omid Ali Parsa said.

Q4 Real-estate Market

According to SCI's latest report on Iran's real-estate market, the average price of each square meter of land or land of a rundown residential property (residential units that are considered old to a degree that only the underlying land is useful for construction) in urban areas went up by 63.4% during Q4 (Dec. 22, 2019-March 19) year-on-year.

Prices increased by 15.3% compared with the preceding quarter (Q3 of last fiscal year.)

The minimum price of each square meter of land or land of a rundown property in the capital city stood at 930,000 rials ($3.75) while the maximum was at 750 million rials ($3,024), bringing the average to 46.8 million rials ($188).

The number of land deals made during the last Iranian year’s Q4 decreased by 8.1% compared with the similar period of the year before but increased by 67.3% when compared with the third quarter of the last year.

The average area of each dealt land or land of a rundown property in real-estate agencies across the urban areas was reported at 240 square meters by SCI.

The report also shows the average price of each square meter of residential floor area in the capital city surged by 65.6% in Q4 on a year-on-year basis. When compared with the previous quarter, prices indicated a growth of 15.7%.

The minimum price of each square meter of residential floor area across urban areas during Q4 stood at 1.15 million rials ($4.6) with the maximum price registered at about 714.25 million rials ($2,880). The average price was about 48.45 million rials ($195).

In terms of the number of deals for residential floor areas, the last year’s Q4 saw a decline of 10.2% compared with the Q4 of the year before. Against the Q3 of last year, the number of such deals registered an increase of 82.9%.

SCI put the average dealt floor area at 106 square meters while putting the average age of residential units at 12 years. It also disclosed figures for monthly home rents plus 3% collateral legally paid to rent one square meter of residential floor area.

It reported that the average rent prices increased by 44.6% during last year’s Q4 compared with the Q4 of the year before while they grew by 11.5% compared with the third quarter of last year.

The minimum price of each square meter of residential floor area rented in urban areas stood at 1,625 rials ($0.006) with the maximum being registered at 2.7 million ($10.88) bringing the average to 160,603 rials ($0.64) per month.

Compared with the fourth quarter of the year before, last year’s Q4 rent deals decreased by 43.8%; they decreased by 33.9% compared with the preceding quarter.

SCI reported the average area of total rent deals at 101 square meters and put the average age of rental homes at 13 years.