May 30, 2008 / 12:11 AM / 9 years ago

Iran's housing prices turn many into millionaires

6 Min Read

<p>A view of buildings in north western Tehran May 17, 2008.Morteza Nikoubazl</p>

TEHRAN (Reuters) - Negar Ehteshami just paid the equivalent of $6 million in rials in cash for a luxurious apartment. But it is not in New York or London. It is in the capital of the Islamic Republic of Iran.

"I am a millionaire because of this 300-square-metre apartment," said Ehteshami, a 56-year-old interior designer from a rich Iranian family who has always lived in an affluent northern Tehran neighborhood.

"But nothing else in my life resembles the life of a millionaire," she said, moving her Hermes handbag out of the way as she closed the window of her apartment.

"Here I feel (as though) I am inside a helicopter. I can see the whole city."

Hers is a tale with echoes in much of the West: a house price surge 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 said.

A real estate boom in the world's fourth-largest oil producer has been powered by President Mahmoud Ahmadinejad's economic policies since he was elected in 2005, economic analysts say.

Real estate prices surged by more than 100 percent in 2007, after rising by about 65 percent in 2006 and more than 50 percent in 2005. Some economists see huge scope for the market to keep rising as, with interest rates below inflation, Iranians seek a store of value in property.

"The high prices might be a bubble," said economist Reza Abdizadeh. "It might be fake and not logical. 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 came up with a plan for "quick-impact loans," handing out substantial sums to individuals and companies with plans to create jobs in Iran where the official unemployment rate is above 10 percent.

This stimulus is also a textbook trigger for inflation and alarmed many, including the head of Iran's Central Bank, Tahmasb Mazaheri.

"It has created problems since in effect ... the main issue is massive floating capital," said economist Saeed Leylaz.

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

Criticized 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.

"Super Jump"

"When there is no other opportunity to invest, and interest rates of banks are around 16 percent, naturally money flows to real estate," said Ali Afshari, a real estate agent.

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 60-square-metre apartment in Tehran to pay for his son's wedding in 2007. It has since become difficult for him even to rent a 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 real estate brokers and analysts forecast a "super jump" in prices in the coming months amid mounting international pressure on Iran to suspend its nuclear work.

The United Nations 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 U.S. pressure, European banks have also pulled out.

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

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 U.N. sanctions in 2006.

"Fear that assets may be frozen over the nuclear row and the economic recession in the West have accelerated money flows to Iran," said economist Bagher Safarian.

An engineer involved in mass construction of houses in southern Tehran also saw prices rising even more in 2008 as construction booms in much of the country, including in towns near Tehran, where many poorer workers live.

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

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 where prices range from $2,000 to $20,000.

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

Editing by Sara Ledwith

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