More house construction, more expensive housing The mystery of housing supply in Iran

The cost of construction inputs has more than doubled in one year; Fardin Yazdani says that building more houses does not necessarily reduce prices.

Housing and urban development, Behshad Bahrami: Building more houses is supposed to make housing cheaper. At least this is one of the main arguments of the supporters of increasing supply. But a builder who starts a new project today faces costs that are far from last year. The price of construction inputs in Tehran has more than doubled in one year and the inflation of building production has become one of the most important variables in the housing market. In such a situation, the question is whether the increase in construction can still lead to a decrease in prices?

Fardin Yazdani, an expert on housing economics, in a conversation with Ambassador Arjan, believes that the answer to this question is not necessarily positive in the current situation. He says that the inflation of construction materials and to some extent the price of land has increased the cost of housing production, and this issue can create an upward pressure on prices even with the increase in construction.

Of course, Yazdani proposes another mechanism for the northern market of the country; A situation in which the expansion of construction may, after crossing a threshold, itself become a factor to attract more buyers and increase the price of land and housing.

The construction cost more than doubled in one year

The latest available report of the Iranian Statistics Center on the price index of residential buildings in Tehran provides a picture of the intensity of cost pressure on housing production.

According to this report, the price index of construction inputs reached 336.4 in the spring of 1405; A figure that shows a 106.8% increase compared to the spring of last year. The seasonal inflation of these inputs was also recorded at 20.7%, while this figure was equal to 36% in the winter of 1404. Therefore, although the rate of price increase has decreased compared to the previous season, the cost of building production has continued to increase.

Inflation pressure was not the same among different groups. Point-to-point inflation of wood group has reached 208.9%; This means that the price index of this group has tripled from the spring of last year. Building painting group has also experienced a 64.9% price increase in just one season.

These figures are related to the city of Tehran and cannot be directly generalized to all cities in the country. Also, the index of construction inputs does not include all the cost of building a residential unit; The price of land, wages, cost of financing and other expenses also affect the final cost.

In the same period, the statistics of the Statistics Center indicate a negative real growth of 6.4% in the construction sector in the spring of 1405. This figure indicates the decrease in the real activity of this sector, although it does not determine what share of the decrease in activity was due to the increase in production cost.

Why might an increase in supply not lower prices?

Yazdani believes that in the current situation, production cost inflation is one of the determining factors of the housing market. A builder who is faced with the new prices of materials and land, also demands a higher price for the sale of a newly built unit. But the price expected by the manufacturer is not necessarily the price at which the transaction is made.

In a market where the purchasing power of households has decreased, the buyer may not be able to pay the offered price. In this case, the builder must either accept a lower profit, or postpone the sale, or give up on starting the next project. For this reason, the increase in the cost of construction does not always lead to the growth of transaction prices; Sometimes the result is a decrease in profitability and a drop in construction.

the mystery of the north; When construction creates demand

Yazdani has a different explanation for some areas in the north of the country. He believes that the expansion of construction in these areas can lead to an increase in the attractiveness of an area for villa buyers after crossing a threshold.

According to him, if only one residential unit is built in a pristine area, it may not make a significant change in the market. But when the construction expands, the attention of buyers is drawn to that area and a new demand is formed.

Yazdani mentions the experience of a northern village where at first the price of land and housing was low, but gradually with the increase of construction and the arrival of villa buyers, the prices also increased. In his story, the increase in the number of houses helped to make the area known, which attracted more buyers.

He explains this situation with herd behavior of demand. Buyers may react to the presence of other buyers and the expansion of construction in addition to the characteristics of the land and the location of the area. In such a market, the arrival of new demand can neutralize or even overcome the decreasing effect of increased supply on price.

Housing market waiting for capital buyers?

Yazdani differentiates between the current state of the country's housing market and the periods when capital demand was more active. He believes that in different circumstances, the expansion of construction in a region could have helped to form capital demand and even speculative influx. But now political uncertainty has caused such a demand to not have a prominent presence in a large part of the housing market.

According to this expert, some areas in the north of the country are somewhat exempt from this situation; Because war conditions have affected the demand for buying housing in these areas. Of course, the size of this effect and its difference between different regions cannot be determined without transaction information and the composition of buyers.

Tehran housing market, an industrial city and a tourist village in the north of the country do not necessarily move with the same forces. In one, the manufacturer faces costs that the buyer cannot afford; In another, more construction may draw new buyers to the area.

For the first-market builder, the question is who to sell the overpriced home to. In the second market, the construction of more houses could be part of the reason for the influx of new buyers. Increasing supply in these two markets does not necessarily have the same result.