Nahid Pilvar
Following a period of unprecedented rise in home prices in Iran, the housing sector now finds itself in a clear slump. We have conducted an interview with economic expert Saeed Leilaz regarding the roots of this phenomenon and its effects on various sectors of the Iranian economy. Read on for the details.
Rooz (R): In previous years the Iranian housing sector had never experienced such a sudden rise in prices (which has recently led to a slump). What is the cause?
Saeed Leilaz (SL): In the past two to three years, Iran experienced a period in which the largest number of houses were constructed in the nation's history, meaning about 120 million cubic meters of housing was built in Iran's urban centers. This volume of construction led to an increase in prices of cement, construction materials and steel, and, in turn, home prices shot up and housing sector profits drove people to this area of activity. In general, one can say that the housing market in Iran has its own particular trends and cycles, kind of like a game of dominos. When inflation takes over the market, it hits the housing market as well and increases home prices. On the other hand, when the public is faced with falling prices, even home owners try to sell their property.
R: So given the volume of construction one can say that because supply has increased, demand has decreased and the market is balanced, which is why the housing sector is in a slump now?
SL: In Iran, we have never had a shortage in supply of housing and never faced that problem. For example, from 1996 until 2006, according to data, density of housing units decreased from 1.5 to 1.4, which shows that there was no shortage of housing supply. In Iran, supply has always exceeded demand and now too one million homes have been built, whereas essentially there is no need for one million homes, which again shows that the housing sector is driven by capital and profiteering plays a large role in it.
R: In your opinion, how much has the lack of security related to threats of military attack on Iran contributed to the fall in housing prices?
SL: It has had no considerable effect, because military attack is not taken seriously by the Iranian masses, and the Iranian people have not been engaged with the nuclear case. For example, we see that the Iranian stock market has been very active in the past few weeks, but if people were concerned with a military attack that should have impacted the stock market first. Some people have even decided to sell their homes to invest in the stock market.
R: Now, what consequences does this housing slump have for Iranian economy, given that the housing market is a big investment market in Iran?
SL: [The slump] will have very serious and dangerous impacts on the Iranian economy, because housing construction leads to activation of 500 kinds of jobs in the industrial and services sectors. In all parts of the world governments always try to support and keep profitable the housing sector in order to keep other industrial and services sectors thriving. Investment exit for the housing sector, in addition to destroying employment opportunities created by a thriving housing sector and causing a new wave of unemployment in the country, creates ripples in other parts of society as well. The housing sector always operates like a sponge that absorbs investment and now that this sponge has been saturated, the extra water - which is investment - is fleeing to other sectors of society, which in turn causes turmoil in those sectors. However, from the economists' point of view, neither slump is good nor an unprecedented and irregular rise in housing prices. The government is obliged to discover and implement methods and economic formulas to keep this sector balanced so that the country's economy, as a whole, is kept healthy and thriving.
R: In your opinion, how many years would the current slum in housing market last?
SL: Currently, no prospect of change in Central Bank's monetary policies is seen, and it seems like the current housing slump would last for at least two years. New activity may begin in the housing sector after these two years.
R: Given the current slump in housing market, where would excess investments go and what sector or activities will be thriving in Iran?
SL: Since two or three weeks ago, money has been flowing into the stock market and the Tehran stock market has been seriously shaken. However, not all excess investment from the housing market has been injected in to the stock market. Actually, the Tehran stock market does not have the capacity to absorb all that investment, and the investment that has been absorbed by the stock market in the past two weeks is equally only to two percent of the capital in the housing sector. In other words, equal to capital to build two thousand residential units or 500 thousand cubic meters of construction, which is not comparable to the current volume of 120 million cubic meters of construction in Iran. Nevertheless, this excess investment and money is dangerous for the Iranian economy, and the government, in addition to fighting the housing slum, must attempt to prevent the rise in housing prices and calm the atmosphere for investment.
R: If the Tehran stock market cannot absorb all this investment, where would the investment go and where would it be invested?
SL: After two years, it will return to the housing sector, and this return is a disaster for the Iranian economy. Because when investors in this sector begin constructing homes again, old homes become nonexistent and most have been renovated, so they demolish homes under 20 years old to rebuild and this is equal to deterioration of pure investment. Homes under 20-years-old do not need renovation, but because the capitalist want to increase his capital he buys these homes and builds them anew, wasting the country's pure investment in the process. Officials must note that the wave of return of investment following the slump is followed by further financial damage.
