This was stated by Fardin Yazdani, a housing expert and the developer of the Comprehensive Housing Plan of the Ministry of Roads and Urban Development, in a write-up for the Persian economic daily Donya-e-Eqtesad. Below is a translation of the text:
High inflation rates in the tenancy market and the emergence of rental housing as one of the major problems were first reported in the 1370s [the Iranian calendar years from March 1991 to March 2001].
Statistics of the time show that 15-18% of Iranian households lived in rented homes. Buildings were constructed by families as their own personal residence; commercial real-estate development that we see today was nascent.
Over the past three decades, however, changes in Iran’s macroeconomy and market policies led to a rise in households incapable of owning residential properties.
The upward trend in the share of new households in the tenancy market and a decline in the number of families living in their own homes began in the 1370s, which accelerated in the following decade and experienced a leap in the next ten years.
Aside from the increase in new tenants, some families who already owned a shelter were forced to sell their properties due to unstable economic conditions and began to live in rental homes. There is no documented and detailed information on the number of these households but evidently the demand for rental homes on the part of both these groups is on the rise.
Rental Market Return at 8-12%
The supply of rental housing did not keep up with demand. The ratio of people’s income from rent to the total value of a housing unit (rental market return) has fluctuated between 8% and 12% in recent years, suggesting that renting out houses is not an economically viable decision when compared with other asset markets.
Hoping for an increase in the price of their property as a result of instability and inflation has been the only stimulus home owners had in recent years to rent out their dwellings. This comes as the share of the income generated from work relative to income from assets has also fallen sharply over the past years, particularly since the fiscal 2006-7.
In the same year, out of 1,000 rials in income, 330 rials were income from work, which dropped to 220 rials in the fiscal 2015-16. Consequently, the newly-formed families whose main source of income was work couldn’t buy a home and had to rent one.
In the fiscal 2013-14, when the Comprehensive Housing Plan of the Ministry of Roads and Urban Development was in the making, we [the writers of the plan] reached the conclusion that demand for rental homes is on the rise in the country and would soon affect the future of real-estate market significantly.
We informed the housing decision-maker that tenancy would soon become a pressing issue and that they have to focus on working out an effective solution to the problem.
With the reimposition of sanctions in 2018, asset markets experienced considerable volatility and the real-estate market witnessed a steep rise in prices. The average price of a square meter of residential property in Tehran jumped from 48 million rials in 2017-18 to more than 300 million rials now, i.e., a sixfold increase over four years.
These developments coincided with the decline in the real income of people. All these led to a sharp decrease in the number of people living in their own residential properties and in return, an increase in tenancy.
Home affordability dropped due to the decline in households’ saving potential. Additionally, households’ ability to pay rents fell dramatically as well, thanks to inflation and the decline in real income. Numbers show 40 out of 100 newly-formed households entered the tenancy market in the 1380s [March 2001-11]; the ratio increased to 80 households [out of 100] in the fiscal 2016-17, indicating that none of the government initiatives for the housing market has succeeded in improving the number of individual home ownership; the failure of government housing policies are evident in the fact that the share of tenants has soared over the years.
Ideally speaking, only 20% of new households managed to buy a home in 2016-17. Following the sudden increase in home prices in 2018-19, which continued into 2020-21, this share has definitely decreased even further.
Supply Side
On the supply side, the rise in construction costs and land prices resulted in an increase in the end cost of housing.
Given the deep recession in home deals, real-estate development turned into an economic activity that lacks a good profit margin for builders. A decrease in supply in tenancy market naturally followed the recession and put a brake to real-estate development, which triggered an increase in rent levels.
On the other hand, due to the absence of effective taxing tools and their deterrent effect to counter the hoarding of housing units, a part of purchased homes by the wealthy households and investors were kept vacant. All these were manifested in rising rents.
The tenancy market’s attempt to revive the normal price relationship with the real-estate market is not desirable due to the significant growth in rents after a period of price increase, but it is normal from another aspect. That part of the increase in rents, which results from the decrease in supply and an increase in speculative activities in the real-estate market, requires intervention. In actuality, part of the inflation in rents this year is due to the tenancy market inclination toward adjusting its normal relationship with housing prices, but the other part is due to supply shortage.
The outbreak of Covid-19 aggravated the situation; government-mandated price ceiling set for rents also failed to curb the runaway inflation. Occasionally, these policies even exacerbated the decline in the supply of rental homes.
Governments have never sought to intervene in the rental market, despite previous predictions about the escalation of unresolved issues. For example, some of the housing units built under the government-sponsored Mehr Housing Project were supposed to be offered on the rental market at affordable prices for five years, after which their builders were allowed to sell them. That plan never came to pass and all the homes were sold.
Government’s Reluctance to Tap Into Tenancy Market
In truth, governments have always been reluctant to expand the tenancy market for reasons of political economy. Tenancy market does not have a strong turnover compared with the government-sponsored real-estate mega projects.
However, addressing social housing and launching a professional rental market is inevitable and the governments’ procrastination could exacerbate the problems.
Different countries with different political, ideological and economic approaches provide means required to offer rental housing and to solve the housing problem, they launch a professional rental market. This is the main strategy of policymakers around the globe to provide housing for their people.
On the execution of real-estate mega projects, the policymaker needs to know that such projects are practically doomed to failure given the limited budget of households and the people’s incapability in financing the construction of these housing units. It is vital for the policymaker to allocate a part of this government-sponsored package to the construction and supply of rental housing.
In doing so, we can hope that by giving a breathing room to new households and young couples, they will be able to purchase a residential property in the coming years; otherwise, no measure, including mandatory pricing, can ease the uncertainties of the rental market.