Notes

Strategies to reinforce the financing of the housing sector in the capital market

The housing sector is a major economic sector that can turn into the engine of economic growth and development. Furthermore, the housing sector has a significant impact on employment, creating the highest rate of jobs among other sectors of the economy, as suggested by statistics. Therefore, it is critical to address housing as an essential and legal need of individuals and a solution to enhance economic growth and improve employment and welfare.

Policy-making in the housing sector is divided into two supply stimulation or demand stimulation. Policies to support housing providers and builders fall into the supply stimulation, and supporting the consumer by increasing their purchasing power fall into demand stimulation. In Iran, the policies adopted and implemented in recent years aimed to stimulate housing demand and increase buyers’ purchasing power.

It should be noted that the cost of housing is one of the highest costs in the Iranian expenditure basket and accounts for a large share of expenses. However, the growth of housing prices in recent years has escalated this share. The data provided by Iran’s Statistics Center indicated that the percentage of housing costs has increased from 25.6% in 2009 to over 33% in 2020. However, this share has always been higher in urban households than in rural households, while in the lower deciles, it has been far higher than in the high-income deciles.

 

 

 

Given the significant share of housing costs in the household expenditure basket, policymakers must formulate and reinforce appropriate financing mechanisms to improve the ability of individuals to provide suitable and standard housing via demand stimulation policies.

Currently, the financing of housing in Iran highly depends on the banking system that has a  considerable part in financing, with other financial tools being rather disregarded for this purpose, inflicting the following problems on this financing system: limitations of bank credits, low ratio of the number of facilities to the value of the residential unit, low flexibility of the banking system, and a high share of the number of installments for repayment subtracted from salaries.

To improve the conditions and ensure the prosperity of housing demand as one of the basic needs and a lever for boosting the Iranian economy, it is necessary to reinforce and develop other financing tools in addition to increasing housing facilities. However, in this regard, the role of the government in improving the provision and construction of housing is irreplaceable. Accordingly, there are financing tools in the capital market that include real estate investment funds (to strengthen the housing demand) and land and building investment funds (to boost the supply of and investment in housing).

Evaluating the performance of these funds and the current number of funds in the market (according to the information available on the OTC site, there are two funds) indicates that these tools have failed to contribute to the development of the housing sector by absorbing micro and macro capital. This failure can be attributed to the mismatch between the expected returns of the investor and the actual returns in the market. In fact, these funds operate like other fixed-income funds where investors cannot benefit from the constructed units or the associated returns. It has been seen that sometimes the return rate of these funds has not matched with other market tools and capital assets.

While other available tools to strengthen the housing sector, including leasing, have failed to compete with bank facilities, considering investors’ tastes in the housing sector can help design more efficient tools.

The participation of three elements is necessary for the development of the housing sector:

  • landowners
  • construction contractors
  • investors

Investors’ main incentive for participation is to provide housing for themselves or optimize the quality of accommodation. Hence, along with designing novel tools in the capital market, investors’ warm participation will not seem like a far-fetched idea if governments play a broader and more active role in this field.

Given the capacity of the capital market and the possibility of employing an independent supervisor in construction projects via the stock exchange, designing more efficient tools can unquestionably affect the housing economy positively.

Increasing the provision and supply of housing (supply stimulation) and increasing the purchasing power of individuals to strengthen demand lead to stability and balanced housing prices, raising transactions and creating prosperity in this market and prosperity in the previous and subsequent circles. Therefore, economic growth would seem more feasible.

Khodadad Gharibpour

Managing Director of Sepehr Saderat Financial Group

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