Iran's Housing Sector Rocked by Currency Crisis

EghtesadOnline: After enjoying a short period of growth on the back of stable outlooks and government support, Iran's housing and construction sector has once again contracted in the first six months of the current Iranian year that ended on Sept. 22, a central bank official said.

News ID: ۷۸۴۱۱۶

08 October 2018

"As indices fell, the added value of the housing and construction sector was negative and contracted by 2.2%. We must think of a solution considering this level of instability," Abolfazl Akrami, director general for economic affairs at the Central Bank of Iran, was quoted as saying by the official news website of the Ministry of Roads and Urban Development on Friday.

Previous CBI data show that the housing and construction sector registered a small growth rate of 0.1% during the first quarter of the current Iranian year that ended on June 21, in what many believe could be its last such growth in the foreseeable future.

Even as prospects are not very bright, the tiny growth registered during the period was actually a vast improvement compared with the similar period of last year when the sector had contracted by 3.5% when it was still mired in its longest-running recession in recent memory, which lasted for more than five years, Financial Tribune reported.

But after the final contraction last spring, the sector registered consecutive growths of 3.1%, 1.4% and 2% in the next three quarters, meaning that it experienced four consecutive quarters of growth. Overall, the sector's growth was equal to 1.2% during the whole of the previous fiscal year that ended on March 20, 2018.

The reason for the downturn in the housing sector is a currency crisis that has unfolded in the past few months on the back of the psychological effects of US sanctions' reimposition after US President Donald Trump unilaterally withdrew in May from the Joint Comprehensive Plan of Action, the formal name of Iran's nuclear deal with world powers.

The crisis has increased home prices, most significantly in the capital city of Tehran where prices grew by 74% on a year-on-year basis during the sixth month of the current year, according to the latest CBI report.

In addition to limiting purchasing power, the crisis has also increased prices of construction materials, further contributing to the sector's decline.

> A Housing Sector Snapshot Since Rouhani Took Office

In his address to a housing conference recently held in Tehran, Akrami also painted a picture of Iran's housing and construction sector from the beginning of President Hassan Rouhani's tenure about five years ago.

He said while general inflation stood at 34.7% during the first year of Rouhani's tenure in the fiscal year that ended in March 2014, the housing price for each square meter increased by 30%.

"The declining trajectory of inflation was much lower in the housing sector in the ensuing years, therefore real home prices declined constantly in this four-year period," he said.

The CBI official pointed out that the government focused the lending capabilities of state-run Bank Maskan more than ever on the ailing sector to help it rebound from its long recession in that period.

Akrami added that while 281 trillion rials ($2 billion) worth of loans were allocated to the sector in 2013-14, the figure jumped to 517 trillion rials ($3.7 billion) during the previous fiscal year.

"That led to a 5.4% annual increase in the rate of residential deals across the country in the fiscal 2016-17 and an increase of 11.8% last year," he said, all signs that the sector finally emerged from its long period of stagnancy.

However, as returning US sanctions robbed Iran's economy of a relative state of stability, a declining national currency affected all sectors.

Akrami further said an increase in foreign currency rates entails a rise in the prices of construction materials and higher home prices, which will eventually lower purchasing power and face us with an uncertain outlook.

The CBI official noted that as home deals are declining on a wide scale, the finished cost of housing is rising considerably, adding that although finished buildings have registered agreeable growths, buildings whose construction has recently started present a better picture of the current situation.

"From the first quarter of the previous year [ended June 21, 2017] until today, these buildings have declined and contracted as figures are not satisfactory," he said.

> Exploring the Ways Out

Akrami said the easiest way out might be to bolster housing loans, but also pointed out that this will be challenging since Iran is suffering from a very high level of money supply even as its manufacturing sectors are hurting.

"At present, we must pass this difficult period by facilitating financing with the cooperation of the banking system and support from the government and the Ministry of Roads and Urban Development," he said.

"Problems of the housing sector will not be alleviated until the purchasing power of the people is increased, so we must consider funds for low-income groups and offer cheap housing".

> Cause for Hope

Iran's rial has been strengthened in recent days after new authority was extended to CBI. This has also renewed some level of hope for the housing sector.

"As foreign currency and gold prices have declined in the past few days, we must wait for the wandering capital in these markets to move to the housing market," Saeed Asouyar, a member of the board of the Association of Mass-Builders, told Fars News website.

He added that most housing market players believe that home prices can no longer see surges and will therefore be ready for at least a slight rebound.

But there is no certainty that the housing market will rebound, at least not in the short run, since there are no guarantees that the rial will not depreciate again.

"As more than 85% of construction materials are manufactured locally, we must witness a price stability in the housing market, if the declining trajectory of foreign currency rates were to continue," Mostafa Qoli Khosravi, the head of the Association of Realtors, was quoted as saying by Fars News Agency.

"The housing sector will become stable if the current declining trend of foreign currencies were to continue, but it cannot with certainty whether home prices will rise or fall in the future," he said.