Urban Rent Inflation Tops 24%

EghtesadOnline: The average Consumer Price Index for rents in urban areas during the four-quarter period ending Sept. 21, which marks the end of the second quarter of the current Iranian year, increased by 24.3% compared with the corresponding period of last year.

News ID: ۷۵۱۲۳۳

11 October 2020

The Statistical Center of Iran had put the annual inflation rate for the preceding quarter, which ended on June 20, at 22.7%.

The highest and lowest average annual inflation rates were registered for Lorestan and West Azarbaijan provinces at 32.3% and 8.9%, respectively.

According to the SCI report, CPI for rent levels in urban areas (using the Iranian year to March 2017 as the base year) stood at 195.8 in summer, the second quarter of the current Iranian year (June 21-Sept. 21), indicating an 11.8% increase quarter-on-quarter.

SCI had put the QOQ rent inflation rate for the preceding quarter, which ended on June 20, at 3.4%.

Hamedan and Sistan-Baluchestan provinces registered the highest and lowest quarter-on-quarter inflation rates for tenants in urban areas with 16.2% and 3.1%, respectively.

The consumer rent price index in urban areas increased by 28.9% in Q2 over the same quarter of last year.

SCI had put the year-on-year rent inflation rate for the preceding quarter, which ended on June 20, at 23.3%.

The highest and lowest inflation rates on a year-on-year basis in the second quarter of the current year were posted by Hamedan with 37% and West Azarbaijan with 8.6%.

Housing Inflation

CPI measured for housing in urban areas was at 196 in Q2, indicating an 11.8% rise compared with the previous quarter and a 28.9% growth over the same quarter of last Iranian year.

SCI had put the quarter-on-quarter and year-on-year housing inflation rates for the preceding quarter at 3.4% and 23.3%, respectively.

The average annual housing CPI increased by 24.3% in Q2 compared with the similar quarter of last year. It had put annual housing inflation rate for the preceding quarter at 22.8%.

CPI for maintenance and repair services of residential units, including plumbing, plastering, home electrification and insulation services, in urban areas stood at 216.2 in Q2, indicating a 12.6% rise compared with the previous quarter and a 32.5% growth over the same quarter of last year.

SCI had put the quarterly and year-on-year maintenance and repair services inflation rate for the preceding quarter at 6.4% and 25%, respectively while CPI for maintenance and repair services increased by 27.3% in the four-quarter period ending Sept. 21.

SCI had put annual maintenance and repair services inflation rate for the preceding quarter at 27.1%.

Price-to-Rent Ratio Surges to All-Time High

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

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

In the year ending March 2017, when Iran’s housing market was relatively stable and did not experience a sudden or 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 buy than rent; a price-to-rent ratio of 16 to 20 indicates it is typically 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 the last year.

Several conclusions can be drawn from these data:

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

Second, the rise in rents has been higher in Tehran than in other Iranian big cities.

These data can also provide a solution to 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 for landlord.

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 return on investment (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 two-way dead-end. On the one hand, rental affordability is lower than current rents and on the other, homeowners are disheartened by the decline in rental ROI.