A translation of his write-up in the Persian economic daily Donya-e-Eqtesad follows:
The loan-to-value ratio is a simple formula that measures the amount of financing used to buy an asset relative to the value of that asset. It also shows how much equity a borrower has in the home they’ve borrowed against, or how much money would be left if they sold the home and paid off the loan. It is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage.
LTV is the inverse of a borrower’s down payment. For example, a borrower who provides a 20% down payment has an LTV of 80%.
The average LTV ratio amounts to 70% globally, which means that the average value of mortgages constitutes 70% of the value of the residential property. In fact, LTV is a criterion for calculating the effectiveness of housing facilities.
Imagine the average price of a square meter of a housing property in Tehran at 300 million rials ($1,100); that puts the value of a 75-square-meter unit at 23 billion rials ($84,403). Before the recent twofold increase in the value of loans introduced by the Money and Credit Council, a top financial decision-making body with the Central Bank of Iran, the ceiling on home loans for a married couple was 2 billion rials ($7,339), i.e., less than 10% of the price of a mid-sized, ordinary home in Tehran compared with the 70% average LTV ratio in the world and 80% in developed countries. Thus, increasing the value of home loans under the current conditions was an appropriate, necessary move.
Over fiscals 2014-15 and 2015-16, when the so-called housing saving fund was established and flourished, thanks to the relative economic stability of those years, the price of a 75-square-meter housing unit hovered around 3 billion rials ($11,009) and the value of home loans granted to married couples was 1.6 billion rials (5,871). As a result, the LTV ratio was higher than 50%, making home loans efficient, as it was value for money to apply for home loans then.
All these justify the decision made by the Money and Credit Council to raise the value of home loans. However, the question is whether the inflated loan is affordable for people with middle incomes, given its lending rate, repayment period and the amount of installments?
In reality, fourth to seventh income deciles are the target groups of home loans. The first three low-income deciles can’t enter this financing system due to their inability to make down payments and the top high income deciles don’t need such loans to purchase a home, thanks to their financial capability.
Even dual-career couples who fall into middle-income deciles (fourth to seventh deciles) can’t pay back loans with monthly installments worth 90 million rials ($330). This creates a kind of impasse; on the one hand, it is necessary to raise the ceiling on home loans; on the other, the value of installment payments is unaffordable for the middle class, first-time home buyers.
Here, the government’s intervention must come in the form of supportive facilities such as “single-digit lending rates”. At present, the interest rate on home loans stands at 17.5%; couples willing to purchase housing bonds need to pay another 600 million rials ($2,200) which makes the real lending rate exceed 17.5%, i.e., around 23-24%. Consequently, these loans become unaffordable for many first-time home buyers.
I believe home loans should cover at least 50% of the value of the property and therefore the ceiling on loans needs to increase even more but these banking facilities are not appropriate for first-time home buyers. Such loans are more useful for people who are seeking to increase their investments in the housing sector by buying a larger or newly-built homes, or relocating to a better neighborhood.
Policymakers know better that long-term home loans are being paid at lending rates lower than 5% in other countries. But those countries first managed to create predictability and macroeconomic stability, and achieve single-digit inflation rate and then began to grant low-interest home loans. In other words, they pay such loans to control inflation.
In Iran, under an inflationary condition, home prices and home loans increase in tandem, and therefore the housing crisis will remain unsolved.
In short, the government needs to lower the interest rate on home loans to a single digit; that’s what happened under Bank Maskan’s Housing Saving Account mortgage initiative years ago.
If that’s not done, home loans won’t produce the desired result for the target group, i.e., first-time home buyers of middle-income deciles.