Property Booming in Iran

June 1, 2008

Negar Ehteshami has just paid the equivalent of R46 million in rials in cash for a luxurious apartment. But her new home is not in New York or London, it is in the capital of Iran.

"I am a millionaire because of this apartment," says Ehteshami, an interior designer from a rich Iranian family who has always lived in an affluent northern Tehran neighbourhood.

"But nothing else in my life resembles the life of a millionaire."

Moving her Hermes handbag out of the way as she closes the window of her 300m2 apartment, Ehteshami says. "Here I feel [as though] I am inside a helicopter. I can see the whole city."

Her tale has echoes in much of the West, where a surge in house prices has been fuelled partly by easy lending. In Iran, however, people are still being priced out of the market.

Mansour Bagheri, a businessman living in Germany since 1980, hopes to make a fortune from this business model.

"I get loans in Europe, where I live, and buy apartments in Tehran. I am all set to become super rich," he says.

The property boom in the fourth-largest oil producer has been powered by the economic policies of President Mahmoud Ahmadinejad since he was elected in 2005, economic analysts say.

Last year house prices more than doubled, after rising by 65 percent in 2006 and more than 50 percent in 2005. With interest rates below inflation, some economists see huge scope for prices to keep rising as Iranians seek a store of value in property.

Economist Reza Abdizadeh said: "The high prices might be a bubble. It might be fake and illogical, but it is a fact. Historically, housing prices have never dropped in Iran. The government might be able to stop prices from rising, but will not succeed in lowering them."

Shortly after Ahmadinejad was elected, his government began lending substantial sums to individuals and companies that had plans to create jobs.

The "quick-impact loans", which were intended to reduce unemployment from an official rate exceeding 10 percent, alarmed many, including Central Bank of Iran governor Tahmasb Mazaheri, because such a stimulus is also a classic trigger for inflation hikes.

Economist Saeed Leylaz said: "It has created problems … in effect the main issue is massive floating capital."

The government has said that those who used the money to invest in property and not to create jobs would be banned from obtaining loans for five years.

Criticised by politicians and economists for his populist economic policies, Ahmadinejad cut bank interest rates despite strong liquidity growth last year. They are now well below inflation, currently above 20 percent a year.
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Ali Afshari, a real estate agent, said: "When there is no other opportunity to invest, and interest rates of banks are around 16 percent, naturally money flows to property."

The government has tried unsuccessfully to rein in prices.

With one million prospective owners coming on to the market each year and Iran capable of building only 600 000 new homes a year, conservative politician Mohammad Khoshchehreh said there was a shortage of 1.6 million homes.

Hamid Taghavi, a government employee with two children, sold his 60m2 apartment in Tehran to pay for his son's wedding last year. It has since become difficult for him even to rent a much smaller apartment.

"I wanted to buy a smaller apartment with the rest of the money, but it seems at the age of 55 I will be homeless in less than two years," he said.

Stoking the fire, some property brokers and analysts forecast a huge jump in prices in the coming months amid mounting international pressure on Iran to suspend its nuclear work.

The UN has imposed three sets of sanctions on Iran over its disputed nuclear programme. In addition, Washington has blacklisted three of Iran's main state banks and, under US pressure, European banks have also pulled out.

Mehrdad Divani, a broker expecting yet more Iranian capital to go into bricks and mortar, said: "Low interest rates, strong housing demand … and the threat of additional UN sanctions on Iran will fuel property prices."

Foreign capital has played a large role in the market's success, because of money repatriated by Iranians living abroad, which analysts believe has increased since Iran was first hit by UN sanctions in 2006.

Economist Bagher Safarian said: "Fear that assets may be frozen because of the nuclear row as well as the economic recession in the West have accelerated money flows to Iran."

Mansour Khalilian, an engineer involved in mass construction of houses in southern Tehran, also saw prices rising even more this year as construction booms occurred in much of the country.

"People have money and they do not trust Iran's banking system because of political and economic instability," he said. "Also because the dollar and gold are losing value, people prefer to invest in property."

Among those hit by rising prices are Mahmoud Rahimi, a 35-year-old government employee, and his wife Simin. He said it was now impossible for them to buy a small apartment in Tehran.

"If we do not eat, drink and basically do not spend a penny for the next 40 years, then maybe we can afford to buy a 20m2 house" said Rahimi. "If, of course, prices do not increase."


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