Mortgages

As the dispute on 'increasing the mortgage ceiling' between Ministry of Roads and Urban Development and Central Bank has lingered for months, mass producers offered two finance models for house purchase to the government with the aim of overcoming economic stagnation. The government has targeted non-inflationary stimulus of housing demand in its stimulus package against stagnation. To that end, the Ministry of Roads and Urban Development is looking forward to obtaining the permission to double the current mortgage ceiling and an average of IRR800 million loan payment for house purchase from Central Bank.
But Central Bank is to believe that strengthening the mortgages will be detrimental and will ultimately trigger higher housing prices. National Association of Housing and Building Mass Production of Iran put forward the idea of improving the home purchase power through loans in order to alleviate Central Bank's concerns and called for the government and banking system's all-around concentration on financing constructions. The suggestion of the Association mainly revolves around granting loans with the ability to transfer the loan to the purchaser. If agreed on, the new model will not only serve as the stimulus behind a new wave of supply in the housing market, but will also increase the demand and ability to purchase the already constructed units. The Association has asked for 75-80 percent coverage of all construction costs without setting a ceiling for loans. Similar to the Ministry of Roads and Urban Development's proposition, the Association has requested Central Bank to set the parameters of construction loans in line with the potential economic costs in respective cities or provinces.
In their second proposal, mass producers criticized the government for allocating zero budgets from National Development Fund to the housing sector and announced: "A situation in which banks are facing stiff limitations of resources and little has been done to improve the condition of loans is an alarming circumstance and the board of National Development Fund need to improvise a new formula to allocate a proportion of exchange revenues to the renovation of housing sector."
Speaking of the status of housing sector for the government's economic team of experts as the pioneer of economic revitalization, mass producers stressed: "The injection of resources from National Development Fund at the moment is more of a necessity than a request." Mass producers have put forward two finance models for house purchase to the government. The proposal, although advantageous, are the source of three major concerns for Central Bank. Since the very beginning of negotiations with the Ministry of Roads and Urban Development, officials from Central Bank spoke of the possibility of a price hike in housing sector as a result of increased loan ceiling; a situation which could disrupt the fragile peace ruling over the market. The negative impact of increased loan ceiling on inflation is the second concern and Central Bank officials have managed to delay the increase of loan ceiling so far by adhering to that. The third, and arguably the biggest concern of Central Bank is the inability of borrowers to clear their loans, especially when the majority of borrowers are the middle-class. In spite of that, mass producers have proposed two solutions as the way out of blocked construction projects and stagnant housing sector. Mass producers are confident that their solutions will effectively address Central Bank's three-fold concerns.
Through the first proposition, mass producers have requested the increase of home loan ceiling as much as 80 percent of the final construction cost while the second proposal revolves around the interconnection between construction industry and National Development Fund. In other words, mass producers are trying to say that instead of setting a fixed limit for mortgages, the officials are better off covering as much as 80 percent of construction costs of a single residential unit while taking economic factors of the host city or province into account. More precisely, mass producers are calling for taking into consideration the ability of borrowers in clearing their debts with respect to various economic factors ruling over every region.
In order to reduce Central Bank's concerns over the increase in inflation and house prices following the increase of mortgage ceiling, mass producers have advised officials to first invest the loan in supply cycle rather than granting the loan directly to applicants. Of course, this method requires the possibility of transfer to the buyer. As a result, every loan will be allocated to the construction of one residential unit, and one unit only. In this case, Central Bank will no longer have to worry about intensified inflation and soaring house prices. Mass producers have criticized some of the oppositions to the allocation of National Development Fund's resources to the housing and construction sector and underlined the negligence of officials as the biggest hurdle on the road to recovery. Interestingly, the board of National Development Fund recently approved to grant loans of 15-21 percent interest rates to different economic sectors including water and agriculture and natural and tourism industries. Officials from housing sector had previously requested loans from National Development Fund, but the Fund's new law excluded the sector from loans.
Two Solutions for Two Problems
In a press conference, the head of National Association of Housing and Building Mass Production of Iran spoke of two proposals for the government as the ways out of the stagnant home market and the effective solution to address the finance of mass producers.
"We have requested the government to increase the mortgage ceiling as much as to cover 80 percent of final construction costs and to grant loans to producers instead of injecting the money into the housing market. Importantly, the loans must be transferable to buyers," said Jamshid Barzgar.
He went on to say: "The amount of mortgages will not be fixed. Instead, it will depend on economic factors of each city and province and borrowers' ability to clear their loans. Therefore, loans will cover as much as 80 percent of construction costs accordingly."
Barzgar added: "Mortgages granted for construction will work out differently from loans to purchase houses and will certainly not increase the inflation. Allocating loans to construction will revitalize construction cycle, will increase the public's purchasing power and will strengthen mass producers."
Regarding the proposed method of mass producers to the government for setting the rates of interest, Barzgar explained: "Interest rate of 12 percent will be granted to first-time and qualified house buyers while 14 and 16 percent rates of interest will cover the rest of applicants. We believe that these logical numbers will lead the housing market out of stagnation."
Empty Houses Do Not Belong to Us
The head of mass producers' Association criticized the government's hesitation to finance mass construction projects via National Development Fund resources and said: "I don't exactly understand the logic behind the opposition to our request. Most mass producers put their units on sale after 30-percent completion and the claim that empty houses belong to mass producers is absolutely wrong. Most of the units we are speaking about are located in uptowns and do not belong to mass producers."
Combinational Loans from National Development Fund
On the new proposals of mass producers, Ali Chegini, general manager of the Ministry of Roads and Urban Development's planning and housing economy office said: "The idea of granting mortgages to construction instead of direct allocation to applicants is nothing new and has been on the table for decades."
Chegini continued: "Previously, there were occasions in which loans were granted for the purpose of construction and that at the time of the sale of the unit, loans were transferred to buyers in the form of installments. Housing sector officials would agree that a proportion of loans should be granted for construction while being transferable to buyers, but the process should be conducted in agreement with construction market's balance."
He further stated: "Despite all the ideas and arguments, making decisions regarding mortgage takes thorough analysis and practical solutions must be extracted based on scientific studies."
On the relativity of mortgage ceilings in different cities and provinces, Chegini commented: "We have similar structure in the Ministry of Roads and Urban Development, thus we have set a series of loan ceilings for different regions around the country in order to maintain correlation between construction costs and purchase prices."
Chegini concluded: "The housing sector -as one of the pillars of Iran's economy with numerous interconnections with macro and micro industries- will play an extremely important role for the country's recovery from the stagnation. Therefore, the sector must be financed accordingly. One solution to overcome stagnation ruling over the housing sector is the allocation of exchange resources of National Development Fund to this pivotal department. Resources can be granted in the form of combinational loans for various construction projects."