One of the attractive markets for investment in Iran is the real estate market. But how do we assess the outlook for this market? During the past decades, the price of property has experienced a rally, which lead to weakened purchasing power, and therefore the average time needed for owning a property in Iran in the most optimistic situation would have been 10 years. However, the average time needed for owning a property in most of developed countries is between 3 to 5 years. The price of property in Iran has been influenced by a variety of factors, some of which will be examined below:
Population Growth: The growth rate of population in Iran during the post revolution years has increased significantly, so that at the end of the 1360s (1980s), Iran’s population had doubled compared to that of the year 1978-79, with the year 1985 showing the highest birth rate. After 1989-90 and with the implementation of the family control policies, growth rate of the population started a declining trend which has continued until today. Presently, the average age for marriage in Iran is 27 years for men and 25 years for women (some sources declare higher numbers) which, demonstrates that the peak year for the demand of the married population has been the year 2012, after which the demand of this generation has started to decline. Another point is regarding the demand of the unmarried population which shows a rising trend, but is also most influential in the demand for smaller units. Taking into account the population peak and the decreasing birth rate, it seems that this part of demand will also start a declining trend.
Final Price: During the past years, production limitations, demand pressures and liberalization policies all resulted in a significant growth in the price of production inputs in Iran. In this regard, we can point out the limited production of cement in 1989 thereafter. During these years, due to the launch of various development projects and an increase in housing construction and the limitation in production, the price of cement experienced volatility in the free market, and therefore the pricing for this product started to be determined by the officials. This resulted in prioritizing the construction of cement producing units, which in turn led to a sharp increase in the production of cement and therefore created a surplus in the supply of this product. As a result of this issue, expectations for the growth in the price of cement have been low. Iron girders and round bars are part of industries that have been included in the liberalization policy and their prices are determined based on the exchange rate for dollar and other international exchange rates, and regarding the adopted policies and also forecasts concerning global prices little growth is expected in this sector. Other industries such as tiles, faucets and valves, etc are experiencing the same situation. Another point that should not be overlooked is the price of land relative to the final price of the property which, regarding its close dependence to the property, has the same prospect.
Taxes and vacant residential units: Statistics show that more than 400 thousand vacant residential units exist in Tehran. This high number has resulted in more sensitivity towards this issue and has brought up the topic of taxes on these units. Moreover, discussions surrounding the subject of taxes on transactions have been proposed and it seems that they are likely to become law. However, the technique of obtaining this tax still remains vague. By levying this tax the housing market will experience a drop in the number of deals and the supply of vacant residential units, which can influence the prices in the real estate market.
Mortgage loans: The amount of mortgage loans has been stable for a long time but has been increased in the last two years. This increase however, has not been a strong stimulus for the demand for houses. Presently, this loan only covers a small portion of the total price of a residential unit while the ratio of mortgages to the income of families is still a high number. In other words, these loans have high PTI and low LTV. Another point regarding these loans is their rate of return. Currently, there are two methods for obtaining these loans: 1) opening a deposit for a fixed period of time and then obtaining the loan, 2) purchasing housing mortgage rights. In both methods the effective rate of return for obtaining the loan is higher than other loans. For instance, in the second method, the person pays an amount higher than 10% of the obtained loan in order to purchase these securities and the bank takes a 17.5% interest for this loan, making the effective interest rate on these loans higher than 29%, which is a high rate compared to rates of return on other types of loans. Presently, payment of mortgage loans is carried out exclusively by Maskan Bank and other banks and leasing companies have limitations vis-a -vis the payment of mortgage loans and this is a major problem existing in the mortgage market.
Based on the above mentioned issues, the housing market is not assessed as a suitable market for investment and it is expected that in the long run it yields a lower rate of return for investors compared to the rate of inflation. Considering the price trend in the housing market since 2011 until now reveals that despite an increase in prices during 2012 and 2013, as a result of the subsequent drop in prices during 2014 and 2015, the percentage growth in property prices has lagged behind the inflation rate. It is noteworthy that in this report we have only discussed the investment in property and the topic of construction does not follow the same trend, which will be discussed in another occasion.