Housing Market Problems Lie Beyond Supply Side: Expert

EghtesadOnline: Policymakers of Iran’s housing sector have always focused on increasing supply and production without taking note of other issues related to the market failure, Nasser Yarmohammadian, a lecturer at Urban Economy Faculty of Art University of Isfahan, said in an article published by the Persian economic daily Donya-e-Eqtesad.

News ID: ۷۸۷۳۷۹

05 December 2021

A translation of the article follows:

One of the behavioral biases among policymakers is “effort justification”. Based on this bias, people assess a particular task or activity more favorably when it involves something that is difficult or unpleasant. In other words, they have an incorrect valuation of what is achieved with a lot of time, energy and money. One of the causes of this error is that the human brain overlooks the imbalance between work and the result of work.

One does not want to spend a lot of energy and effort on low-value results, or if one achieves a result, they want to show that this result has been achieved through hard work, a lot of effort and a lot of energy and money.

Iran’s public policymaking in the housing market seems to suffer from this bias. Policymakers have always focused on increasing housing supply and production without taking note of other issues related to market malfunctions. This obsession with ramping up the supply has always placed a heavy financial burden on the government.

Expenses related to land transfer, financing and the economic consequences of financing flaws are examples of costs resulting from the implementation of such policies.

Registration is currently underway in the National Housing Plan. Under this plan, four million homes will be built and offered in four years. Although the need to produce cheap, affordable housing for the poor (at least for the first two low-income deciles) is evident, issues troubling the housing market should not be reduced to only focusing on housing supply and turning a blind eye to other housing problems.

Shortage of supply is not the main problem of Iran’s housing market.

According to the findings of the Population and Housing Census, the number of housing units to households in urban areas increased from 87% in the fiscal 1996-97 to 96% in the fiscal 2017-18, indicating a nine-percentage-point rise. Therefore, housing scarcity has not been an issue over these years.

Issues to Consider

Some of the other housing market problems that the government needs to consider are presented below:

The first issue, which is a multifaceted, macro one, is Iran’s inflationary, unstable economy. It increases the prices of non-tradable assets such as land and real-estate above the general price level. As a result, housing, which is a consumer good, turns into a capital asset for investors and affordable housing becomes inaccessible. Raising more capital reinforces this effect, as it widens the gap more and more.

There are other factors that exacerbate the transformation of housing into an unaffordable asset, in addition to the impact of inflation, as an out-of-market factor, including the lack of mechanisms to curb speculative demand. One of these tools, which has been discussed in policy circles in recent years, is the housing capital gains tax. But an important tax tool that is less talked about in Iran, though it has been employed in all countries prior to the introduction of capital gains tax, is annual property tax.

Property tax is levied as a percentage of the day value of the property. This type of tax deflates to real value the nominal value of the user cost of owner-occupied housing and leads to a reduction in the ratio of rental housing to owner-occupied housing. On the other hand, by increasing the cost of housing maintenance, it decreases the market demand coming from investors.

The disproportionate function of the market is another problem with Iran’s housing market, which has led to the lack of coordination between supply and demand.

To sell their products easily and faster, and prevent the freezing of their capital, real-estate developers must build homes that meet the current and future needs and preferences of the applicants. These preferences vary in each local market.

In large cities, usually small-sized units are preferred. In some local markets, preferences may favor the design, function and use of building materials compatible with the environment. What is certain is that real-estate developers, especially in large cities, do not pay attention to consumers’ preferences.

According to the Statistical Center of Iran, the ratio of empty homes has increased from 4.2% in the fiscal 2006-7 (633,000 empty homes) to 11.3% in the fiscal 2016-17 (2.6 million vacant units). These figures indicate the excessive hoarding undertaken over these years by owners.

One of the misconceptions among policymakers is that they believe provision of shelter for households is synonymous with home ownership, whereas dwellings can be provided either in the form of home ownership or in the form of rent.

Theoretical studies prove that in full market conditions, the costs of both methods are equal (Housing Tenure Choice Problem). Regrettably, in Iran, we face a shortage of supply relative to demand in the rental housing market, while in owner-occupancy housing market, oversupply and shortage of demand are noticeable.

Therefore, public policymaking in the housing sector should be reformed so that the rental supply reaches a relative balance with the demand. Once the annual property tax is introduced, the high costs of leaving a property empty would prompt the owners of more than one home to rent out their properties to pay the costs of the tax.