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Iran's Inflation-Driven Housing Crisis

By Mohammad Mahdi Afkari, Tehran (Source: Mianeh)


In the three years since Mahmoud Ahmadinejad was elected president, Iranians have been had to contend with a novel kind of policy-making on domestic, foreign and economic affairs. Many analysts say decisions have been made on the spur of the moment without any input from experts in the relevant area.


One area that would appear to back up such claims is the housing sector, where Ahmadinejad's policies are widely blamed for fuelling an astronomical rise in prices over the last 18 months. The capital Tehran has fared worst, experiencing something like a 150 per cent rise in property prices, but the housing sector has seen significant inflation all over Iran.


Nima Mohammadi, a resident of Tehran's Narmak district, where Ahmadinejad has a house, says prices have gone up so fast that a property worth 30 million tomans in 2006 was worth around 85 million tomans (or 91,000 US dollars) towards the end of 2007.


Housing construction in Tehran
(file photo)


Where Did the Boom Begin?


Not long after Ahmadinejad came to power, the minister of labour and social affairs, Mohammad Jahromi, came up with a scheme called "quick-impact loans". The idea was that substantial loans would be granted to individuals and companies that submitted economic plans to create new workplaces.


There were many questions about the policy right from the start. Many experts voiced alarm at the potential repercussions, and urged the government not to act without forethought. For instance, the head of Iran's Central Bank, Tahmasb Mazaheri, wrote a letter to President Ahmadinejad warning that the loan scheme would be a debacle.


What looked workable on paper did not translate into success. Lack of supervision and expertise meant that large numbers of loans worth considerable sums of money were handed out willy-nilly.


The funds were not used productively as a motor for driving economic activity; instead, they formed a massive pool of transient, floating capital. It got to a point where central banker Mazaheri stated that the public held liquid assets of 149,000 billion tomans.


The scale of the problem was too great for it to remain a secret.


As Dr Shirkavand of Tehran University's economics faculty has said in jest, in the two years the scheme has been in effect, as much money has been injected into society as in the 2,300 years since the end of the Achaemenid dynasty.


Money Went into Property as Safest Investment


Despite all the tough talk from the Ahmadinejad government on economic as well as political matters, many investment opportunities have been squandered since it came to power and the stock market has been stagnant.


The government did attempt to kick-start the stock market by creating profitable public-sector companies and factories, yet it was unable to restore public confidence and encourage people to invest. The stock market, which should have offered the best mechanism for channelling funds into healthy and dynamic economic development, thus lost its appeal for Iranians.


Another possible area for soaking up all this spare liquidity, the foreign currency markets, also began to look unattractive - in this case because of government-imposed exchange-rate controls. Finally, the banking system failed to draw depositors because interest rates were slashed by two per cent as a way of countering rampant inflation (itself a product of wrong-headed economic policies). The cut in rates was criticised by many banking experts.


As a result, investors - including those who held windfall cash in the form of quick-impact loans - began to look seriously at the property market, always seen as a reliable investment. This sparked massive demand for housing, and the resulting paucity of supply created a price surge almost overnight.


Mohammad Khosh-Chehreh, a member of the parliamentary committee on economic affairs, has spoken of a current shortage of 1.6 million homes, with a million prospective owners coming onto the market every year. Iran is currently capable of building 600,000 new homes a year, at best.


Prices Stoked Further by Institutional Purchases, Lack of Cement


Not everything can be blamed on quick-impact loans; there are of course other factors at work here. Demand has also been driven by large-scale purchases of land and residential and commercial property by Iranian private banks such as Parsian Bank, and also by state banks and other government institutions seeking to bolster their financial position. In this context it is worth noting that all Iranian banks, commercial as well as state-owned, operate under the aegis of the Central Bank and hence ultimately the government.


The supply of new housing has also been constrained by the availability of materials with which to build it. Construction materials have run short as housing project gallop ahead.


As purchases by private individuals and institutions were already placing the industry under strain, the government embarked on a sudden spending spree - its 2006 budget earmarked 40 per cent more for state construction projects than the previous year. According to one member of parliament's budget and planning committee, this happened despite warnings that legislators issued to the cabinet.


In any event, there is little doubt this injection of government expenditure contributed to exhausting supplies of cement, iron girders and other items, fuelling the price of new properties.


Ali Sarrafzadeh, a construction materials merchant, says a sack of cement worth around 1,500 tomans last year is now selling for at least 7,000 tomans.


According to Abolfazl Valadkhani, who manages an estate agency in the Daryan-Nau area of Tehran's Sattarkhan district, "One of the main reasons for the increase in the price of property is the shortage of building materials and the delirious rise in their prices. This has led to these price movements in the building industry."


At the same time, Valadkhani notes that labour is becoming scarcer and more expense as the Iranian government moves to deport illegal workers from Afghanistan, who have provided the construction industry with a large and cheap workforce in recent years.


"An Iranian isn't prepared to work in construction for less than 15,000 tomans a day [17 dollars], whereas the Afghan workers - before they were sent back home - would do a better job than their Iranian counterparts for 7,000 tomans a day," he said.


The government has not ignored the changes in the housing market; indeed, it has attempted to intervene by devising a number of new strategies. However, many of its plans never got off the drawing board as aspects of them were not well thought-through. A plan to tax housing that was left empty is a good example of this. Even those schemes that did reach the implementation stage, such as a plan to build homes to be let on 99-year leases, failed to have a major corrective effect on the market.


The next few weeks as the Iranian year draws closer to its end on March 20 are traditionally a time when prices rise across the board. We can only watch and wait to see how the property market behaves - in other words, just how steeply it rises.


Note: This article is an abridged and translated version of the full original text published on the Farsi pages of Mianeh, with editorial adjustments agreed with the writer made to provide clarity for English-language readers.


About the author:
Mohammad Mahdi Afkari is a journalist and editor with the Andishe-ye Nau daily in Tehran.


About Mianeh: Mianeh is a new independent web-based initiative run as a project by the Institute for War & Peace Reporting ( the award-winning non-profit media development organisation that works across the globe to platform local voices and promote international learning and engagement. Mianeh aims to be an open space for ideas, news and debate where writers in Iran can reach out to each other as well as to those outside the country who are interested in learning more about the vibrant and dynamic society that is Iran today.

... Payvand News - 03/25/08 ... --

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