Mortgage Market Vital for Boosting Consumer Demand

EghtesadOnline: The development of mortgage market is vital, in view of the decline in the purchasing power of Iranians, an economic analyst said.

News ID: ۷۸۵۴۳۷

29 February 2020

“All economists believe that the interest rate must be lowered. It won’t be possible to grant affordable home loans at reasonable rates with the interest rate at 20-odd percent," says Hossein Abdoh-Tabrizi, a former member of Iranian Securities and Exchange Commission, Hibna reported.

“There is no choice but to develop mortgage lending opportunities at moderate rates now that home prices have hit their record high, which are about 3-4 times higher than what it was two years ago. The government needs to offer subsidies from the difference between the interest rate and the interest rate in the mortgage market. Financial constraints facing the government at present can’t be denied, but it can identify resources from which to pay this subsidy,” Financial Tribune quoted him as saying.

Referring to the fact that the housing market could become one of the productive sectors of the economy, which could trigger growth in other industries, Abdoh-Tabrizi said, “Ninety percent of potential home buyers have been priced out of the market as we speak. Under such conditions, other countries introduce mortgage market to trigger consumer demand. To break the housing market impasse, mortgage loans must at least account for 50-60% of home value. The risks of mortgage lending are very low, as the collateral on the loan is the property.”

The former official noted that first-time home buyers are viewed as the target group of housing decision-makers.

“The number of renters is on the rise; it has now reached 50%. Unlike other countries with a strong mortgage market, there is a stark contrast between owning and renting a home in Iran, given the country’s high inflation rate. A household that fails to purchase a house at an old age is very likely to plunge below the poverty line. That’s why the government has been right in choosing young buyers as its target group in the housing market,” he said.

“It is important to know that first-time buyers don’t have abundant resources at their disposal, so they need to secure financial support.”

Abdoh-Tabrizi pointed out that the rise in mortgage loans can accelerate growth in the housing market next year.

“Policymakers of the housing market feel disinclined to raise loan ceilings for fear of inflation. However, the last time the government raised the ceiling on home loans in the year ending March 2016 and in the midst of a housing recession, there were no signs of inflation,” he said.

Bank Maskan's Fiscal 2018-19 Home Loan Stats

Bank Maskan, the state-run agent bank of the housing sector, granted 228,949 home loans worth 113.83 trillion rials ($796 million) during the last Iranian year that ended on March 20, 2019.

“Tehran received up to 30% of all home loans allocated to Iranian provinces. A total of 70,135 home loans worth 39.31 trillion rials ($274 million) were allocated to prospective homebuyers in Tehran last year,” Masoud Izadi, the head of Bank Maskan’s Public Relations Office, said.

Three provinces, namely Khuzestan, Alborz and Isfahan, followed Tehran respectively in receiving the highest shares of home loans allocated across the country.

A total of 16,541 loans worth 7.12 trillion rials ($49 million) were given to applicants in Khuzestan Province.

Prospective homebuyers in Alborz Province received 15,364 loans worth 6.88 trillion rials ($48 million) and those in Isfahan took out 13,273 loans worth 6.61 trillion rials ($46 million) last year.

“Bank Maskan’s Housing Savings Account offers the maximum mortgage loan amount in the country,” Izadi said.

HSA, launched in June 2015, aims to provide first-time homebuyers with cheap loans.

Bank Maskan’s primary and most successful initiative, the scheme requires applicants to make down payments and wait for a year to become eligible for the cheapest home loans in the country.

Target applicants mostly comprised first-time homebuyers.

The scheme requires applicants to make an initial deposit and wait out the one-year maturity period for credits plus the depositor’s down payment.

When the scheme was first launched, the interest rate for these loans was set at 14%. In February 2017, after a directive by the Money and Credit Council, they were reduced to 9.5% in general cases and 8% for those who wanted to buy a home in rundown neighborhoods. These interest rates make HSA loans the cheapest in the country.

HSA is said to be a self-sustaining fund since all the resources it absorbs are redirected to boost the financial strength of Bank Maskan for it to be able to support more homebuyers.

The bank also offers loans for other purposes, including construction and renovation, in various forms, such as bond facilities and savings funds.

Bank Maskan, which is owned by the Maskan Investment Group, accounts for almost all housing loans allocated to Iran's housing and building sector. The Central Bank of Iran does not prohibit other banks from engaging in issuing facilities for the housing sector. However, all of them, except the state-run Bank Melli, have refrained from entering the sector due to the many challenges involved, including a hefty credit crunch.

In January 2018, Bank Melli, Iran's biggest bank, launched a special housing scheme to increase people’s purchasing power and help the sector that was enjoying a long-awaited boom, but is now facing prospects of recession again after only 10 months of growth.

The bank offers two housing plans, which differ in terms of the amount of investment and interest rate.