Report No. 28983 Islamic Republic of Iran Ministry of Housing and Urban Development Strategies for the Housing Sector May 2004 1 Acknowledgments This report was prepared by a team comprising Isabel Chatterton, Loic Chiquier, Omar Razzaz (Team Leader), Bertrand Renaud, Claude Taffin, and Laura Vecvagare. The team benefited from the excellent support and valuable input of Mohammad Mehdi Azizi Fardin Yazdani Boroujeni, Jaleh Dejkam, and Farzin Fardanesh. The team received continued guidance on contents from Nasser Nikouseresht, Minoo Rafi'ee, Firouz Tofigh, and Esfandiar Zebardast. The team also benefited from the exceptional coordination skills of Mersedeh Amini Jadid. Within the Bank, the study was formally reviewed by Robert Buckley and Sally Merril. The team warmly thanks all those who contributed to this study, including any people inadvertently not mentioned, but it bears full and sole responsibility for the final version. This report was prepared during the first quarter of 2002 and reflects the latest data available at that time. The data was updated in the fourth quarter of 2003 when updates were available. Unless otherwise indicated, all data in this report were supplied by local consultants working with Iran's National Land and Housing Organization/ National Habitat Committee. World Bank estimates are based on these data. 2 Iran ­ Strategies for the Housing Sector Glossary Glossary Exchange Rate: 8,000 IRR/Dollar BH: Banque de l'Habitat CBI: Central Bank of Iran CSH: Contractual Savings for Housing CPI: Consumer Price Index DFC: Development Financial Company FAR: Floor-to-Area Ratio FYDP: Five-Year Development Plan FOB: Free on Board GPS: Global Positioning System GIS: Geographic Information system GPM: Gradual Payment Method GDP: Gross Domestic Product GNP: Gross National Product HF: Housing Foundation IKRC: Imam Khomeini Relief Committee LTV: Loan-to-Value Ratio LUFB: Law for Usury-Free Banking MHUD: Ministry of Housing and Urban Development MPO: Management and Planning Organization MOF: Ministry of Finance MOI: Ministry of Interior NLHO: National Land and Housing Organization RTO: Rent-to-Own RRR: Reserve Required Ratio SOE: State-Owned Enterprises SME: Small and Medium Enterprises TSE: Tehran Stock Exchange SSO: Social Security Organization ULDO: Urban Land Development Organizations ULO: Urban Land Organization 3 Iran ­ Strategies for the Housing Sector Table of Contents Table of Contents EXECUTIVE SUMMARY.............................................................................................. 7 Introduction................................................................................................................... 7 Policy Issues................................................................................................................... 7 Bottlenecks and Policy Recommendations ................................................................. 8 Sequencing the Reforms ............................................................................................. 12 1 THE HOUSING SECTOR IN IRAN AND ITS PLACE IN THE MACRO- ECONOMY..................................................................................................................... 15 1. Introduction............................................................................................................. 15 2. The Current Government Strategy....................................................................... 16 3. The Housing Sector's Impact on the Real Economy ........................................... 17 3.1. Linkages with Other Sectors: Income and Employment Effects ....................... 18 3.2. Import Effects .................................................................................................... 19 3.3. Multiplier Effects: Income and Employment Effects ........................................ 20 3.4. Savings--Housing as an Asset with Particular Focus on the Poor.................... 22 3.5. The Housing Sector and the Distributional Effects of Reform.......................... 24 4. Policy Issues............................................................................................................. 26 4.1. Characteristics of the Housing Sector................................................................ 26 4.2. Iran's Housing Challenge .................................................................................. 32 5. Current and Future Affordability of Housing ..................................................... 34 5.1. Subsidy Reductions and Their Impact............................................................... 36 5.2. Implications for Government Policy.................................................................. 38 2 THE URBAN LAND MARKETS IN IRAN......................................................... 40 1. Introduction............................................................................................................. 40 2. Background: Land Policy Since the Revolution.................................................. 40 3. Assessing the Performance of Land Markets....................................................... 43 4. Proposed Reforms ................................................................................................... 52 3 HOUSING SUBSIDIES .......................................................................................... 58 1. Introduction............................................................................................................. 58 2. Housing Assistance.................................................................................................. 58 2.1. Overview............................................................................................................ 59 2.2. Scale of Subsidies .............................................................................................. 61 3. Targeting Subsidies................................................................................................. 69 3.1. Overview............................................................................................................ 69 3.2. Scoring............................................................................................................... 70 3.3. Targeting of Specific Subsidies ......................................................................... 71 4. Subsidies: Efficiencies and Distortions ................................................................. 75 4.1. Inefficient Use of Resources.............................................................................. 76 4.2. Inefficiencies: Interest Rate Subsidies and Limited Loan Amounts.................. 77 4.3. Inefficiencies: In-kind Subsidies........................................................................ 77 4 Iran ­ Strategies for the Housing Sector Table of Contents 5. Conclusions .............................................................................................................. 78 6. Recommendations ................................................................................................... 80 4 HOUSING FINANCE ............................................................................................ 82 1. Iran's Housing Finance System: Organization and Performance ..................... 82 1.1. Iran's Small Housing Finance System Relative to the Economy ...................... 82 1.2. Why Does Iran Have a Small Housing Finance System? .................................. 83 1.3. Housing Dynamics: The Impact of Scarce Financial Services.......................... 95 2. The Supply of Housing Finance Services............................................................ 100 2.1. Housing Finance: The Regulatory Framework................................................ 101 2.2. Operations of the Housing Bank (Bank Maskan) ............................................ 104 3. Reform Issues in Housing Finance ...................................................................... 114 3.1. Strategic and Regulatory Issues ....................................................................... 114 3.2. Specific Housing Bank Activities and Products .............................................. 117 3.3. Developing Secondary Mortgage Markets ...................................................... 119 3.4. Financing Social Housing Policy..................................................................... 121 4. Conclusions ............................................................................................................ 123 5 THE CONSTRUCTION SECTOR ..................................................................... 125 1. Introduction........................................................................................................... 125 2. Industry Organization.......................................................................................... 126 2.1. Who Builds?..................................................................................................... 126 2.2. How Is It Built? Building Patterns ................................................................... 126 2.3. Production and Consumption of Materials ...................................................... 128 2.4. Building Codes................................................................................................. 131 2.5. Technical and Human Resources..................................................................... 132 3. Institutional and Regulatory Framework........................................................... 133 4. Recommendations ................................................................................................. 138 ANNEXES ANNEXES - CHAPTER 1........................................................................................ 139 Annex 1.1.Trend of Selected Price Indices, 1979­2001......................................... 140 Annex 1.2.Housing Expenditure by Income Deciles.............................................. 141 Annex 1.3.Housing Markets..................................................................................... 144 Annex 1.4.The Development Plans .......................................................................... 157 Annex 1.5.Input-Output for the Housing Sector, 1991­92.................................... 162 Annex 1.6.Inflationary Prospects ............................................................................ 164 ANNEXES ­ CHAPTER 2....................................................................................... 166 ANNEXES ­ CHAPTER 3....................................................................................... 175 Annex 3.1. Description of Housing Programs in Iran........................................... 176 Annex 3.2. Statistical Data on Government Housing Programs .......................... 182 Annex 3.3. Description of Housing Subsidies to Various Beneficiaries............... 186 Annex 3.4. Scoring .................................................................................................... 188 Annex 3.5. Housing Foundation (Bonyad' Maskan).............................................. 189 Annex 3.6. Housing-Related Government Budget................................................. 190 5 Iran ­ Strategies for the Housing Sector Table of Contents Annex 3.7. Procedures for allocation of public land.............................................. 196 Annex 3.8. Allocation of Public Land...................................................................... 198 Annex 3.9. Market rent............................................................................................. 201 Annex 3.10. Utility statistics..................................................................................... 202 Annex 3.11. Flow of Subsidies.................................................................................. 203 ANNEXES ­ CHAPTER 5....................................................................................... 206 REFERENCES.......................................................................................................... 219 6 Iran ­ Strategies for the Housing Sector Executive Summary Executive Summary Introduction 1. The objective of this Housing Sector Strategy Report is to assist the Government of Iran in aligning its housing policy with its overall national policy of growth-led distribution. This implies directing housing policy toward enabling housing markets to meet the growing demand for housing, while targeting subsidies to those most in need of assistance. To do this, the government must develop an appropriate policy framework with a view to putting the housing sector on a sustainable, market-based path to meet pent-up demand for housing and to contribute to the new paradigm of growth-led distribution articulated in the country's Third Five Year Development Plan. 2. This study comprises five chapters. Chapter 1 presents Iran's macroeconomic circumstances and the effect its volatile oil-dependent economy has had on the housing sector. The first chapter also discusses the principal challenges posed by the housing sector, with particular reference to demographic pressures, centralized and supply- oriented housing policies, and segmented markets along income. The rest of the chapters examine policies and identify bottlenecks affecting major sectors--including land, subsidies, finance, and the construction industry. Policy recommendations are provided. Chapter 2 discusses the performance of land markets since the 1979 Revolution. Housing subsidies, a critical issue, is examined in Chapter 3. Chapter 4 takes up housing finance: the size of the mortgage market, accessibility to housing loans, and the state's approach. Finally, the construction industry--how it is organized, and the related regulatory and institutional frameworks--is described in Chapter 5. Policy Issues 3. Housing is one of the most important sectors in the Iranian economy. Over the past decade, about 40 percent of total annual investment was poured into it, generating more than 8 percent of the GDP. Although the sector represents about 12 percent of added value--much lower than the share of agriculture (15 percent) and industry (17 percent)-- its economic importance is considerable given its potential for growth and its ability to create jobs and generate personal income. The housing sector employs 11.3 percent of Iran's working population. 4. An unfavorable macroeconomic context. Iran has experienced its own version of the "Dutch disease," so-called because of the experience in the Netherlands, where conditions prevented the diversification of the economy into nontraditional exports and export-substituting industries. Other symptoms of this economic ailment include unstable land and real estate markets. High and volatile inflation (49 percent in 1995­96; 12 percent in 2000­01) and low purchasing power--associated with low productivity and high unemployment rates (13.8 percent)--would be the major constraints on the housing sector. 7 Iran ­ Strategies for the Housing Sector Executive Summary 5. Urban demographic pressures. During the early years of the Revolution, families responded to government incentives to produce more children, increasing the population growth rate from 3.1 percent in the mid-1970s to 3.7 percent in the mid-1980s. Households also responded to promises of free land and housing, causing the urban population to rise from 46 percent in the mid-1970s to 53 percent in the mid-1980s and 61.5 percent in the mid-1990s. Although these population trends have subsided (population growth rate is down to 1.4 percent), Iran has a disproportionately large cohort of young people who will be demanding jobs, housing, and other urban services within this and the next decade. Iran's housing stock of 198 units per 1,000 residents is already low by international standards. 6. Centralized and supply-driven policies. Decisions on supply of land, infrastructure, and housing have been highly centralized and supply driven. The housing sector has also been relying on heavy subsidies. The municipalities have not been empowered to address land supply; constrained supply of serviced land through supply-driven public land allocation policies; underdeveloped housing finance system governed through central bank credit allocation; heavy housing subsidies, most of which are poorly targeted. 7. Segmented markets. Although housing conditions have gradually improved over the past decade, a serious mismatch still exists between supply and demand. Studies of the problem paint a picture of three markets segmented by income: upper-income housing, which is supplied through wealth-driven and speculative investments; housing for middle-income/formal sector employees is secured mainly through government- subsidized programs. Lower-income groups find housing through their own efforts and incremental house construction, although the latter has been declared unauthorized as it falls outside formal plans. 8. The demand in these markets is met in different ways and to different extents. High- income groups (the top 20 percent) reported housing expenditures of close to 40 percent of all housing expenditures by all income groups. Around 60 percent of new housing supply was affordable only by this group (accommodations with more than 100 m2). In contrast, the low-income groups (bottom 40 percent) had housing expenditures equivalent to only 20 percent of all housing expenditures and could afford only 8 percent of the units built during the Second Five-Year Development Plan (accommodations with less than 50m2). Data also suggest that affordability has deteriorated for low-income groups. Bottlenecks and Policy Recommendations 9. The Third FYDP committed the government to important policy objectives and set out four strategic objectives to be accomplished by 2003­04: (i) increase the flow of long-term domestic and foreign resources for housing finance; (ii) promote financing for and mass production of small, affordable housing units adapted to the needs of low-income and vulnerable households; (iii) improve the efficiency of taxation and subsidies in the housing sector; 8 Iran ­ Strategies for the Housing Sector Executive Summary (iv) reduce government controls and devolve responsibilities to local authorities (provincial agencies and municipalities) for housing, urban land management (including government owned land) and promotion of rental housing and housing cooperatives. 10. A primary question is how to realize these objectives. To start, the government should develop a more coherent housing program. Overall efficiency will improve when, first, objectives and instruments are better harmonized, second, operating roles1 are allocated among institutions more efficiently, and, finally, there are more incentives to leverage competition and private markets--notably to build housing units and to mobilize the capital for long-term finance. 11. To realize these objectives, Iran must institute significant reforms on institutional arrangements, the supply of land, housing finance and subsidies, and private-sector provision of housing. 12. Institutional Arrangements. · Streamlining decision-making: Institutional reform must encourage better and more current analyses of the housing sector and produce data in a more timely fashion. Iran needs to improve the coordinating mechanisms among the various bodies--from the Ministry of Housing and Urban Development (MHUD), Management and Planning Organization (MPO), Ministry of Finance (MOF), to Central Bank of Iran (CBI). Such improvements are strategically important for the sector. · Empowering and engaging local government: The reform agenda must assist local authorities and communal associations to assume their full responsibilities through capacity building and other supportive investments. 13. Supply of Land, Trunk Infrastructure, and Tenure Regularization. Land has been the cornerstone of the Iran's housing policy over the past two decades. Today the primary land issues include: · supplies are not commensurate with effective demand--public agencies are acquiring much more land than is being released, and compulsory land acquisitions in and around urban areas have allowed the state to amass vast land holdings; · private land transactions are severely constrained; · inelastic land supply translates into high market prices, in spite of deep subsidies in public land pricing; overall land as a proportion of housing cost is high (at around 40­50 percent); · financing for infrastructure is constrained, further reducing supply of serviced land; and · inflexible land use regulations prevent a timely expansion of city boundaries and redevelopment/densification of neighborhoods, further restricting private supply 1These roles include: Setting social housing priorities; allocating and monitoring various housing subsidies; funding credit capital and/or interest rate subsidies; providing banking services; acting as an institutional investor; conducting building and development activities through subsidiary companies. 9 Iran ­ Strategies for the Housing Sector Executive Summary of land and giving rise to informal and/or illegal settlements, account around 25 percent of urban settlements. 14. In this context, Iran needs a land policy that will: · develop the regulatory environment for efficient land market operations, effective land management and transaction mechanisms, and for improved infrastructure supply; · reduce the market power of public land by phasing out acquisition and hoarding of residential land · devolve land management/allocation responsibilities to local governments; · regularize tenure and upgrade infrastructure in existing sub-standard settlements. 15. Housing Subsidies. Housing subsidies comprise a significant share of the national budget (3­6.5 percent of GDP in 2000­01).2 Evidence suggests that the special groups the government has decided to assist have not benefited from the subsidies provided. In support of the government's effort to provide better-targeted subsidies, Iran needs a housing subsidies policy that will: · Collect better and more specific information on subsidies; improve government accountability by measuring subsidies; review and evaluate the current programs, and consolidate them as appropriate. · Withdraw from direct involvement in provision of housing and eliminate implicit subsidies--such as land allocations at sub-market prices, interest rate caps, and others. Institute direct and demand-side subsidies. · Eliminate utility subsidies through a comprehensive national energy sector reform program, and utilizing part of the savings from reduced energy subsidies towards targeted demand side housing subsidies. 16. Housing Finance. Iran's small housing finance system is controlled by the public sector. The stock of long-term housing loans has been fluctuating between 2.5 percent and 3.3 percent of GDP over the past five years. Furthermore, only 40 percent of the total credit to housing is for long-term purchase finance, and 60 percent goes to long-term construction credits that usually become more risky in the absence of purchase finance. 17. In view of the major bottlenecks and given that improved macroeconomic stability is an important condition for expanding long-term finance, the government should first seek to determine when and where subsidies are needed, and then attempt to separate them from the financing. Housing credits should be extended to existing housing and rental accommodations, even if subsidy programs for targeted groups remain focused on new housing and major renovation because of the desired short-term impacts on labor and growth. It will take time to build the appropriate legal, regulatory, and financial market infrastructures required by a market-based housing finance system. Housing finance will be conditioned by the overall rate of financial liberalization. Housing production will also benefit from more efficient policies on land and other urban 2The latter figure includes 3 percent for housing utility subsidies. 10 Iran ­ Strategies for the Housing Sector Executive Summary development issues. Otherwise, increased housing demand brought on by better financing will lead to higher rates of inflation. 18. Iran is developing new financing products; in view of their deficiencies several precautions should be taken into account when further development takes place: · Reduce the risk associated with loan-linked deposit products. New loan-linked deposit products have been expanding rapidly in Iran. As presently designed, these instruments carry liquidity risks that are growing with the size of these deposit programs. These liquidity risks constitute a growing contingent liability for the government and/or the Central Bank of Iran in the medium term. A supervisory model of liquidity of each type of instrument is urgently needed. · Revise the current secondary-facility finance company (Metrom)3 project. The draft legislation designed to promote a secondary mortgage market carries significant risks for a market-based housing finance system in Iran. This legislation could lead to another directed-credit scheme lending below market. It is strongly recommended that alternatives to Metrom be explored in the effort to develop secondary markets. International experience teaches that secondary markets are beneficial in the long term and should be encouraged. But no meaningful short-term impact should be expected, at least in terms of expanded funding. · Redesign housing credit products. In view of the prospects for continuing inflation in Iran, fixed-rate credit products carry a de facto subsidy indexed to inflation. Financing products must carry an inflation-risk premium. A new generation of more affordable housing credits can be designed by adjusting the credit return every three or five years to a transparent index that shows the evolution of funding costs. 19. Housing Construction. The construction industry in Iran is marked by the major role played by the private sector in construction and the strong government role in production, pricing, and importing of several essential materials such as steel and cement. Despite the Government involvement in some areas, the sector has the potential to grow through increased private sector participation. In particular: first, the number of construction firms, developers, and service companies is sufficient to form the basis for a competitive sector. Second laws and regulations do not inhibit entry into the sector. Third, the supply of unskilled labor is not a constraint, and finally, construction materials are available. Notwithstanding these advantages, Iran needs to exert public-sector control over the construction material industry, and institute a more favorable treatment of public and semi-public construction companies. 20. Public-sector dominance of the construction industry can be mitigated in several ways. One way would be for the government to relinquish ownership and control over construction companies; another would be to encourage banks to sell their equity interests 3The Ministry of Finance and the Economy has drafted an organic law for a new secondary facility finance company: The National Corporation for the Long-Term Sale of Residential Units in Iran, known as Metrom. The new finance company would be chartered to purchase housing credits from the retail market and issue participatory papers backed by these credits to professional investors. By -laws would then follow. In terms of structure and governance, Metrom would be licensed by the CBI as a finance company with mixed public and private ownership. 11 Iran ­ Strategies for the Housing Sector Executive Summary in construction companies to the core private investors and to the public via listing on the Tehran Stock Exchange; bonyad-owned (nonprofit) construction firms would benefit from a separation of commercial and social support functions. 21. Meanwhile, the private sector's role in the construction sector needs to be supported. This requires revision of the regulations favoring the quasi-public companies, and regulations for issuing building permits; increasing the supply of serviced land; expanding insurance products; liberalizing the equipment leasing industry, increasing access to credit, upgrading the skills of workers, and encouraging banks to finance government receivables. Iran does not have an integrated building code. Construction codes need to be developed to support and encourage substitution of energy-efficient materials and appropriate technology. Sequencing the Reforms Table EXCE-1 classifies the reforms presented above by short, medium, and long term. 12 Iran ­ Strategies for the Housing Sector Executive Summary Table EXEC-1. Proposed Sequencing of Reforms Short term Medium term Long term Prerequisites to land Decentralize land management and urban planning. reform Priorities Supply of land 1 Ensure that NLHO land acquisition does not Cease acquisitions by NLHO of NLHO should divest exceed land allocation. land intended for residential itself of all land intended use. for residential use. 2 Rely more on market price and competition in Streamline procedures for Improve private-sector allocations of public land. private sector led land participation in development. infrastructure provision and coordinate trunk infrastructure. 3 Improve NLHO's monitoring of land and Improve land registration/land housing prices and constraints to land supply. transactions services. Restart vacant land tax, property tax and capital gains tax. 4 Ensure that local authorities regularize tenure Revise urban planning and guide future city development in response regulations to allow more to demand demand-responsive density and land use. Prerequisites to Reduce supply constraints, especially on serviced land. subsidies reform Priorities Housing subsidies 1 Improve information collection on subsidies, Improve targeting of subsidies Eliminate interest rate and harmonize different subsidy programs. by adjusting scoring subsidies (depends on mechanism. housing finance reforms). 2 Introduce limits on the size and cost of housing Introduce demand-side Transform fully from in eligibility requirements. subsidies. supply-side (including tax subsidies) to demand- Eliminate general utility side subsidies. subsidies. 13 Iran ­ Strategies for the Housing Sector Executive Summary Prerequisites to housing Improve macroeconomic context and deregulate credit sectors finance reform Priorities Housing finance 1 Reduce risk associated with loan-linked deposit Redesign housing credit products Build the legal, regulatory, products. to resist inflationary shocks. and financial market infrastructure. 2 Explore alternatives to the proposed Metrom secondary Permit banks and insurance Sever links between mortgage project. companies to finance land government and financial acquisition and development. institutions and construction companies. Prerequisites to housing Reduce preferential treatment and access to credit by quasi-public enterprises. construction reform Priorities Housing construction 1 Revise regulations favoring the quasi-public companies, Sever the links between especially as regards government contracts and government and financial contractor grading. institutions, as those between government and construction companies. 2 Revise municipality regulations for building permits to allow for multiple-housing projects, with special discounts or privileges for low-income housing. 3 Develop a framework for attracting private investors in Fully liberalize the equipment Increase timely and housing project ventures. leasing industry. adequate access to credit. Allow and encourage banks to finance government receivables. Increase insurance products at affordable prices. 4 Revise building codes and standards in publicly funded Promote substitution of energy- Standardize building housing projects to allow for substitution of energy- efficient materials in place of steel components in a voluntary efficient materials and appropriate technology and cement without compromising way. techniques. safety. 14 1 The Housing Sector in Iran and Its Place in the Macro-economy 1. Introduction 22. Housing is one of the most important economic sectors in Iran. Over the past decade, about 40 percent of total annual investment was poured into this sector, and it generated more than 8 percent of GDP. Although the housing sector represents about 12 percent of added value--much lower than the share of agriculture (15 percent) and industry (17 percent)--it holds an important place in,4because of its potential for growth and for its ability to generate both jobs and income. The sector currently employs 11.3 percent of the working population in the country. As a labor-intensive activity where about 40 percent of those employed are 15 to 29 years old, meeting the demand for housing can also help to address the current unemployment problem (13.8 percent by the end of 2001), particularly among the young and the unskilled, and address the regional imbalances.5 23. The housing sector has a prominent role in the current Third Five-Year Development Plan (FYDP) (1999­00 to 2003­04). It aims to alleviate poverty with empowerment initiatives, including the creation of jobs, improved access to education and health care, and a social safety net for those most in need of government assistance. The plan has set a goal of cutting the percentage of poor households to 7 percent from its current level of 15 percent; annual job creation is set at an ambitious 765,000 jobs. As a labor-intensive economic sector linked to a number of other sectors (and as a major consumer of intermediate materials), the housing sector is ideally placed for assuming such prominence. Indeed, given the present unemployment levels (13.8 percent at the end of 2001) and the corollary need to create jobs for the baby-boom generation coming of age, housing could become one of Iran's key engines of economic growth. 24. But significant impediments to such growth remain. Iran still relies on overly centralized planning.6 The country's institutional and regulatory environment (a combination of directed credit and excessive public-sector involvement) has weakened local capacity to address rapid urbanization and an underdeveloped housing-finance sector overall. But Iran has made good progress with a series of structural reforms put into place after oil prices fell in the mid-1990s. Some reforms modified subsidies and tax incentives to the housing sector, as the government lowered its profile in the direct supply of housing. In order to meet the high employment targets, the current FYDP further commits the government to a series of fiscal and structural reforms and sets challenging 4Figures correspond to building construction and include both residential and nonresidential activities. Ratios were calculated using the Iran Statistical Yearbook 1379 (March 2000­March 2001), Tehran: Statistical Center of Iran, 2001. 5Regional social imbalances can be described in terms of employment and housing conditions. For a classification of the provinces by housing and by employment conditions, see Minoo Rafiei, "Housing, Employment and Sustainable Development," BHE, Tehran: Bureau of Housing Planning and Economics, NLHO, October 2001. 6The current economic structure of Iran emerges from a complex and highly regulated planned model based on oil revenues. Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy housing targets by 2003­04. But in spite of significant housing gains over the past ten years, the government will likely have a difficult time meeting the Third FYDP targets. Several factors are responsible: first, there is a continued dependence on oil; second, the unification of the rial is worsening prospects for inflation; third, falling levels of personal income and highly skewed income distribution; four, persistent macroeconomic instability, which creates a volatile supply of private housing; and, finally, a weak fiscal base, which hinders the government's ability to target programs and subsidies. 25. The objective of this chapter is to understand the housing sector's impact on the real side of the economy, by establishing linkages with other sectors, and by establishing the contribution of the housing sector, in particular, concerning the distributional impacts of reform. While the emphasis in this chapter is on the economic relevance of developments in the housing sector (i.e., in terms of employment, output, investment, prices), this cannot be achieved without a basic understanding of the nature of housing markets in Iran. Section 2 presents the objectives of the Third Housing Development Plan. Section 3 analyzes the housing's sector impact on the real side of the economy by establishing the links with other sectors and the multiplier effects. Section 4 comprises a short discussion of housing markets in Iran, including the country's macroeconomic circumstances. The last section reviews the impact of subsidy reduction on the affordability of housing, by income decile and draws some conclusions. 2. The Current Government Strategy 26. The Third Housing Development Plan committed the government to important policy objectives. It sets out four strategic objectives to be accomplished by 2003­04: · increased flow of long-term domestic and foreign resources for housing finance in tandem with the adoption of adequate building technologies and the development of a professional and efficient construction industry; · better financing for and mass production of small housing units adapted to the needs and affordability of low-income and vulnerable households in urban and rural areas; · more efficient taxation and subsidies in the housing sector and improved housing insurance; · reduced government controls and devolution of responsibilities to local authorities (provincial agencies and municipalities) for housing, urban land management (including government-owned land), and the promotion of rental housing and housing cooperatives. 27. A primary question, of course, is how to realize these objectives. In Iran, the average built area per housing unit decreased from 149 m2 in 1986 to 124 m2 in 1997. The country therefore needs to produce smaller accommodations and reduce household density to 1.12. The housing plan is moving in this direction by removing most controls from land markets and freeing financial markets for housing finance (i.e., the most recent 16 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy Commercial Bank Act). The plan envisions a total of IRR 142,060 million (in 1999­2000 prices) in government and private investment from 1999/00 to 2003/04. 28. As with the Second FYDP, the Third plan supports mass production of housing by allocating to developers a large share of banking facilities in housing and construction sectors. The objective is for developers to build almost half the 3.1 million new housing units in the period 2000­04, 69 percent of which are to be erected in urban areas. So far, if one counts the number of dwellings, Iran is meeting its annual targets for 1999/00­ 2001/02; but only around half of Iran's "social" (less than 50 m2) and "supported" units have been built. The current housing plan is summarized in Table 1-1. Table 1-1. Housing Supply for the Third Five -Year Development Plan Housing supply Base year Budget for the Third Housing Development Plan Total year (equivalent thousand units) 1998­99 1999­00 2000­01 2001­02 2002­03 2003­04 1999­2004 Total units 464 510 560 620 680 744 3,114 Housing units = 100 sq. m./unit 122 146 175 211 250 292 1,074 Urban rent-to-own units built 41.4 54.4 64.6 77.4 91.2 106.8 393.6 Units built for Sale 36.5 47.6 60.8 77.4 100.8 127.2 413.8 Investment--(RI b) Total (constant prices) 21,180 23,580 25,840 28,360 30,940 33,400 142,060 Total (current Prices) 2,180 26,407 35,478 43,277 51,546 59,879 216,587 GDP (current prices) IRR b 582,050 Totals may not add up due to rounding. Source: Third Housing Development Plan, Tehran: Ministry of Housing and Urban Development, 1999. 3. The Housing Sector's Impact on the Real Economy 29. The housing sector in Iran is seen as one of the engines for economic growth, and as such, key assumptions have been built into the Third FYDP. With a view to providing smaller accommodations (built area of housing unit decreased from 149 sq m in 1986 to 124 sq m in 1997) and reducing the household density to 1.12, the housing plan aims at removing most controls from land markets and freeing financial markets for housing finance (i.e., recent Commercial Bank Act). This plan has been the focus of much evaluation by Iranian experts--only the most important features of the plan are discussed here. An outline of the plan is presented in Annex 1.4. 30. The current plan envisages a total of about IRR 142,060 million (in 1999­2000 prices) of government and private investment from 1999­00 to 2003­04.7 Like the 7This investment must be accompanied by increased governmental credits to the sector. A study has found that if one rial is added to governmental credits for the private sector, the private sector will increase its investment in housing by 0.0814 rials (i.e., an increase of 12 rials to credits will result in one rial worth of increased investment by the private sector). See Mansour Khalili Araghi, The Effects of Credit Policies on the Housing Sector with a Look at the Supply Side, BHE, Tehran: Bureau of Housing Planning and Economics, NHLO, 2001 17 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy Second FYDP, it supports mass-housing production by allocating a large share of banking facilities in housing and construction sectors to developers. The objective is to have almost half the 3.1 million new housing units in the period 2000­2004 built by the developers, 69 percent of which are to be in urban areas. 31. This proposal raises several important economic issues. First, is it wise to devote immense resources to housing in order to stimulate the economy? Second, will the housing program have significant effects on income and employment? Third, will increased imports of construction materials have important negative effects? Fourth, is the program likely to deliver distributional impacts of policy reforms? As for the first question, it appears that, yes, assigning such large resources to the housing sector is indeed justifiable; the impact on the economy may well be significant. Second, the housing sector may be capable of generating important increases in income and employment, particularly for unskilled workers, who have relatively low incomes. These effects are due mainly to the linkages of housing with other sectors and, to a lesser extent, to multiplier effects. Supporting arguments, along with possible constraints that may hinder economic benefits to the neediest households, are presented below. 32. Iran has a demonstrable need for increased flows of annual housing at the low end of the income distribution. But far fewer "social" housing units were built during the Second FYDP and the first three years of the Third FYDP, especially in comparison with the goals in the original plan. Moreover, the private sector built more "free" housing, by definition for the high-income groups. In addition, the construction sector enjoys excess capacity, and the main construction materials used in housing are readily available. Since the private sector is sufficiently mature, it is quite likely that if private developers were granted timely and adequate access to long-term credit, the industry would become more responsive to the housing needs of the poor, including rental accommodations. Finally, the Third FYDP follows the trends set out in the previous plan concerning number of units and public/private participation. So its implementation will likely suffer no loss of time and thus no substantial delays in the delivery of the benefits. 3.1. Linkages with Other Sectors: Income and Employment Effects 33. The housing sector is very important to the economy partly because of the high level of interdependence with other sectors. Recent studies show that the backward linkage coefficient between housing and industry has increased from 0.37139 in 1986­87 to 0.45714 in 1991­92.8 This means that the amount of goods and services the housing sector requires to produce the same output has increased, mainly because of altered construction patterns and technologies.9 34. The extent of backward and forward linkages between housing and other sectors is shown in Annex 1.5. The production of one unit of output in housing requires 0.06276 8 Mansour Khalili Eraghi, "The plan of economic analysis of investment in housing sector," BHE, Tehran: Bureau of Housing Planning and Economics, NLHO, 1378 (1999). 9According to 1991 official statistics, 85 percent of total housing was built of steel, concrete, brick and mortar, a significant increase from 65 percent in 1986. In so far as durable buildings use to a greater extent industrial materials, it is expected that backward linkages between housing and industry would be stronger. 18 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy (forward linkage) and 0.86175 (backward linkage) production in other sectors. A study10 of the 1991­92 input-output table for 78 subsectors ranked the housing sector at 27 and 58, respectively, in backward and forward linkages, and at 32 in net linkage (net coefficient equals 0.462688). This means that the production of each unit of output in the housing sector requires a total intermediate consumption of 0,462688 and generates 0.537312 units of value added.11 In addition, 10.8 percent of total housing demand is in the form of intermediate demand and 89.1 percent is in the form of final demand for finished goods.12 35. Translating the above coefficients into estimates of actual national income during the Third FYDP shows that housing, a labor-intensive sector with significant forward linkages to other economic sectors, has an important role to play in increasing both employment13 and overall national income. It has been well established that, in general terms, housing generates more employment per unit of output than does construction as a whole, because housing construction is more labor-intensive than other types of construction.14 Iran has assumed a total of IRR 142,060 billion investment from 1998­99 to 2003­04 to meet final demand for housing in these years (Table 1-1). In this case, an additional IRR 122,430 billion worth of output from other economic sectors will be generated. This corresponds to an additional IRR 122,420 billion 15and IRR 8,916 billion 16 worth of output from other economic sectors originating from backward and forward linkages, respectively, with the housing sector. 3.2. Import Effects 36. As mentioned above, production of one unit of output in housing requires 0.06276 (forward linkage) and 0.86175 (backward linkage) production in other sectors (Annex 1.5). A comparison of these coefficients with those for domestic backward linkages (0.710084) and domestic forward linkages (0.07281)17 shows the small share of imported products used in the housing sector. Thus, the additional input required to generate one unit of output in housing is most likely all domestic, and as a result IRR 21,567 billion out of the IRR 122,430 billion of additional output generated in other sectors will be in the form of imports. The small generation of imports will proceed from multiplier effects that stimulate demand outside the housing sector. 37. This conclusion rests on the fact that most construction materials Iran requires are domestically produced, and that the few imported electronic materials represent a 10Mansour Khalili Eraghi, 1999. 11Of total 1991 housing sector output of IRR 3,450 billion, IRR 1,596 billion were in intermediate materials, IRR 596 billion in labor costs, IRR 1,179 billion in operational surplus and IRR 77.7 billion as tax. 12Of the 1991 housing sector output of IRR 3,450 billion, IRR 376 billion were in the form of intermediate demand, IRR 3,054 billion in the form of final consumption demand of households and IRR 22 billion in the form household investment. 13The inverted Input -Output table shows all direct and indirect employment effects of production changes in all sectors of the economy. 14Edwin S Mills, Macroeconomic Aspects of Proposed Chilean Housing Assistance, Washington, D.C.: World Bank, 1983. 15Estimated as 142,060 times 0.86175 (Annex 5). 16 Estimated as 142,060 times 0.06276 (Annex 5). 17 Mansour Khalili Eraghi, 1999. 19 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy negligible percentage of housing construction costs in Iran, particularly of low-income housing. Should this assumption be incorrect, and the Third FYDP were greatly to stimulate imports, the domestic multiplier effects will not materialize and the program will not be entirely desirable--unless, that is, foreign earnings increase exports. 3.3. Multiplier Effects: Income and Employment Effects 38. The construction sector is the third sector after agriculture and manufacturing, in terms of employment. According to the 1996­97 census, there are 14.57 million persons employed in Iran, of which 1.65 million are employed in the construction sector. Estimates for 2000­01 show that 19.61 percent of all those employed work in manufacturing, 25.62 percent in agriculture, and 10.25 percent in construction. Direct employment by the housing sector is estimated at about 54 percent18 of all employment in the construction sector. 39. As with the construction sector, the labor-intense housing sector has a high potential for job creation; its share of total employment in the country, its high elasticity of production, and its high potential for growth are other positive features. Recent studies19 on the job- creation potential of the construction sector have estimated the production elasticity of employment to be 87 percent. Thus, expansion and contraction of activity in the construction sector will lead to a rapidly increased and decreased employment in the sector. This is partly the result of a flexible employment structure that relies on short- term labor contracts, often based on daily wages. This suggests that if existing obstacles for investment and production are removed (for example, laws/regulations restricting investment), then increased production will result in increased employment 40. A detailed study of 78 subsectors20 places the housing sector at seventh in potential employment generation. In 1988­89, this sector, with an employment multiplier coefficient of 4.26, generated a total of 714 new jobs (575 direct jobs and 139 indirect) for each IRR 1 billion of additional final demand.21 Based on this, the potential for job creation by the housing sector for the Third FYDP (1999/00­2003/04) was estimated as 502,500 jobs (404,300 direct jobs and 98,200 indirect jobs) as shown in Table 1-2.22 Using a GDP multiplier of 3.13, typical of other countries with excess capacity,23 we can see that this kind of investment in the housing sector will raise GDP by more than 1 percent. 18Calculated from 0.89 million in 1997­98 in housing and 1.65 million in construction (1996­97 census data). Employment in residential and non-residential building construction is 87 percent of employment in construction sector (see G. Farjadi, "An analysis of the job creation potential in the construction sector," BHE, Tehran: Bureau of Housing Planning and Economics, NLHO, December 2001"). 19G. Farjadi, 2001. 20Pejman Sourshejani Samani, "Determining the key sector of the Iranian economy (using the input-output table)," Plan and Budget Journal, no.36, 1378 (1999):12­24. 21Mansour Khalili Eraghi, 1999. 22Assuming annual population growth of 1.65 percent and average unemployment in 1999­00-2003­04 of 13­15.1 percent. 23Edwin S. Mills, Macroeconomic Aspects of Proposed Chilean Housing Assistance (Washington, D.C.: World Bank, 1983). 20 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy Table 1-2. Estimate of Cumulative Employment Generated by the Housing Sector Year 1997­ 1998­ 1999­ 2000­ 2001­ 2002­ 2003­ 2004­ 98 99 2000 01 02 03 04 05 Housing Production Urban (1000) 283 286 304 340 380 430 480 530 Rural (1000) 141 143 152 170 180 190 200 214 Investment (RI ­ ­ 21,180 23,580 25,840 28,360 30,940 33,340 billion), 1999 prices Cumulative Urban Direct (1000) 691 709.5 724.9 797.7 789.2 868.3 950.8 1019.2 employment Indirect (1000) 167.9 172.4 176.2 193.8 191.8 211.0 231 247.7 Rural Direct (1000) 203.4 206.3 219.2 245.5 256.2 277.7 300 329.2 Indirect (1000) 49.4 50.1 53.3 59.6 62.2 67.5 72.9 80 Total Direct (1000) 894.4 915.8 944.1 1042.9 1045.4 1146 1250.8 1348.4 Indirect (1000) 217.3 222.5 229.5 253.4 254 278.5 303.9 327.7 Direct and 1.11 1.14 1.17 1.29 1.30 1.42 1.55 1.68 indirect (million) Source: Mansour Khalili Eraghi, "The plan of economic analysis of investment in housing sector," Bureau of Housing Planning and Economics, NLHO, 1378 (1999). Table 1-3. Employment Generation Assumed in the Third FYDP Year New direct New indirect Total New housing employment employment employment (million m2) 1999­00 78,900 18,500 97,400 5 2000­01 98,000 24,000 122,000 4.7 2001­02 109,000 26,000 135,000 5.3 2002­03 112,000 28,000 140,000 5.4 2003­04 104,000 25,000 129,000 5.1 1999­00 to 2003­04 501,900 121,500 623,400 25.5 Note: These estimates are overestimated because these were prepared used the outdated 1988 Input -Output table. Source: Base-year figures are from the Bureau of Housing Planning and Economy. Other figures were estimated using, G. Farjadi, "An analysis of the job creation potential in the construction sector," BHE, Tehran: Bureau of Housing Planning and Economics, NLHO, December 2001. 41. A more current estimate,24 shown in Table 1-3, indicates that total employment generated by the housing sector during the Third FYDP may be slightly higher, indeed, as 24New direct and indirect employment generated is estimated using figures for new housingproduction and investment shown in Table 1.14, employment multiplier coefficients for 1989/80, and average floor areas per housing unit of 100 m2 as shown in Table 1.24. According to statistics published by the central bank of Iran, the house price index in 1999­ 2000 was 13.24 times higher than in 1988­89. Thus, assuming the relationship between housing price and investment is unchanged, and IRR 1 billion final demand in housing sector in 1999­00, the employment generated would be 44.7 (direct) and 10.5 (indirect), resulting in an employment multiplier coefficient of 4.25. 21 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy high as 623,400 jobs (501,900 direct and 121,500 indirect jobs),25 or 16 percent of the estimated jobs to be generated economy-wide (3.8m). Thus, the housing sector may help to address Iran's growing unemployment problem, which some estimates say will reach 24 percent by 2011 if the current policies fail to deliver.26 Indeed, forecasting undertaken for the Third FYDP shows that each year (1999­00 to 2003­04), on average, 676,000 people have sought entrance into the job market. 42. The extent of additional direct or indirect income from housing activities, and how these will affect additional consumption spending, is uncertain. Some additional income will be paid as taxes, and some will be saved, depending on the savings propensities of those involved and their tax rates. As the housing sector employs low-income and unskilled workers, it can be assumed that their spending will reflect their means and therefore it will trickle down into the same income group. As a result, multiplier effects may be large should employment generation take place among the low-income groups; recall too that low-income groups have higher propensities to consume and lower tax rates than high- income workers. 3.4. Savings--Housing as an Asset with Particular Focus on the Poor 43. In the past, inflation and the presence of an underdeveloped finance sector made housing the preferred asset for accumulation of household wealth. Investments in housing would preserve, to some extent, the real value of savings. This gave rise to the speculative nature of the housing market, which has reinforced its market relation to assets such as gold, foreign exchange, and stocks. Indeed, econometric studies have found a link between price expectation in the housing market (and its results on housing demand) and the price expectation in the foreign exchange market.27 The relationship between housing markets and the Tehran stock exchange is less pronounced, owing mainly to the fact that the stock exchange initiated operations in 1990­91. 44. Thus, tight foreign exchange controls, implemented in 1995­96, led investors to the housing market. Housing prices increased 28 percent and then 35 percent (Table 1-4). The average price of a residential unit in Tehran grew by 58 percent and 47 percent respectively. Total urban housing investment increased from IRR 14,000 billion in 1994­ 95 to IRR 16,000 and IRR 39,000 billion in the following years. On average, increases in house construction costs from 1996 to 2001 are around 46 percent; price increases for land are about 58 percent. In large cities like Tehran, land prices increased 55 percent while infrastructure costs increased 28 percent28. 25 This estimate relied on Farjadi, "Analysis of job creation," cited above, which used the 1988 Input-Output table. The use of these outdated coefficients would overestimate the employment generation today. 26Masoud Nili, "Iranian economic development outlook," Budget and Planning Journal, nos. 34 and 35, 1377 (1998­ 99). 27. Fardin Yazdani, "A review on the efficiency of market performance in urban areas," BHE, Tehran: Bureau of housing planning and economics, NLHO, 1380 (2001). 28 Report on the Activities of Housing Construction in Urban Areas of the Country, 1991­2000, Tehran: Central Bank of Islamic Republic of Iran, 2001 22 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy 45. Studies of household's savings by income deciles were carried out in the cities of Esfahan and Tehran during 1995 and 1997 respectively (see Table 1-4); low-income households save only 5 percent of their annual income, while middle-income households save up to 34 percent of their annual income (estimate for the fifth decile). Similarly, households with the lowest incomes tend to invest in dwellings with purchase values of up to 66 percent of their annual income; households with the highest incomes tend to invest in dwellings with purchase values up to three times their annual income. Thus, for low-income households, the purchase of a home is the only possible vehicle for wealth accumulation. This is getting increasingly more difficult over time because of the overall deterioration in the savings rate since 1992­93 (Table 1-5). Table 1-4. Savings and Investment in Housing by Income Decile (1995 and 1997) Esfahan (1995) Tehran (1997) Decilea Annual Saving Housing Savings Housing Decile1 Annual Dwelling Annual Savings/ Dwelling income and investment and assets/ investment/ income present savings income value/ (RI m) assets (RI m) Income income (RI m) value (RI (RI m) (%) income (RI m) m) Q1 3.0 1.98 1.98 0.66 0.66 Q2 5.5 6.6 6.6 1.2 1.2 Q2 5.2 15 0.26 5 2.88 Q3 9.8 19.6 16.66 2 1.7 Q3 8.2 37 1.31 16 4.51 Q4 11.2 44 2.69 24 3.93 Q5 14.2 103 4.87 34 7.25 Q6 15.6 40.56 30.42 2.6 1.95 Q10 32.3 96.9 62.98 3 1.95 a. Based on 2001 average annual income by decile. Note: Results are indicative only, because sample population is small (200 households). Source: Naghsheh Jahan Counsultancy Engineers, Comprehensive Project of Sepahan Shahr, Tehran: 1995, and Sharmand Consulting Engineers, Feasibility of the Housing Construction Implementation in Pakdasht, Tehran: 1997. 46. Estimated household savings from1992 to 2001 by income decile (in 1992­93 prices)29 are displayed in Table 1-5, which also shows the real reduction in savings over this period for all income groups. This has resulted in a reduction in the rate of homeownership for all income groups and in particular for the lowest decile, for which the ownership rate fell by 3 percent. 47. It appears that this speculative activity might decline in the short term, when inflation rises (Annex 1.6). With rising inflation will come some degree of instability in foreign exchange, which may in turn create economic volatility--which in turn may affect housing demand among high-income groups, as their speculative preference might 29 Assuming that the average tendency to save follows the Gompertz function (i.e., savings of the lowest decile must be minimum 1 percent (for the low-income groups), 22 percent (for the middle-income groups), maximum 40 percent (for the high-income groups) and on average 18.5 percent. The results are derived using the equation S=K*A^b^y, where S is the tendency to save; K is savings ceiling (i.e., 40 percent for the high-income groups); y is income and A and b are constants. 23 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy shift to foreign exchange. Studies30 of the incentives affecting housing demand have shown that more than 70 percent of housing demand among households in mid- and high- income groups originates in the desire to accumulate and protect wealth in the form of housing. Rising inflation will also affect housing demand by the low-income groups because their consumption will increase in response to inflationary pressures, leaving even less spending power for housing. Evidence indeed suggests that low-income groups finance their consumption needs during inflationary periods through the sale of housing.31 Table 1-5. Changes in Savings and Housing Ownership of Urban Households from 1992 to 2001 Decile 1992­93 2000­01 2000­ 1992­93 2000­01 RI m RI m 01 Home Home Annual ownership ownership Average Housing Other Savings Average Housing Other Savings savings (percent) (percent) expenditure expenditure expenditure expenditure expenditure expenditure (1992/3 prices) IRR m 1 0.72 0.3 0.4 0.05 4.9 2.2 2.7 0.04 0.006 60 57 2 1.3 0.49 1.23 0.7 8.7 3.5 5.2 2.3 0.39 63 61 3 1.8 0.66 1.14 1.7 11.4 4.4 7 5 0.28 71 69 4 2.2 0.8 1.4 3.2 14 5.1 8.9 9.4 1.6 72 70 5 2.7 1 1.7 6.1 16.6 5.8 10.8 25.3 4.4 73 73 6 3.2 1.1 2.1 9 19.5 6.5 13 33.1 5.6 73 74 7 4 1.4 2.6 19.6 23.3 7.7 15.6 53.6 9.2 75 74.5 8 4.9 1.7 3.2 27.6 28.5 9.1 19.4 94.2 16.2 76 75 9 12.1 3.4 8.7 112.9 37.4 11 26.4 216.9 19.4 80 79 10 13.2 3.5 9.7 124.9 74.5 17.2 57.3 686.6 119 81 80 Source: Statistics on the expenditure and income of the urban households in the country, 1992­2000, Tehran: Statistical Center of Iran, 2001. Also World Bank estimat es based on consultants' reports. 3.5. The Housing Sector and the Distributional Effects of Reform 48. Income and employment multiplier effects, in addition to forward and backward linkages, suggest that Iran may be justified in assigning such resources to the housing sector and that the impact on the real economy may be significant. The housing sector may be capable of generating income and employment, mainly for the unskilled who receive relatively low incomes. In particular, there is a case for a stronger emphasis on low-income accommodation. The social need is great and the negative effects of imports would be minimized. For the housing potential to materialize, however, the regional differences in terms of real capacity of housing production must be taken into account and a careful assessment of the current constraints and future potential (particularly financing for supply and demand) must be carried out at the regional level. For example, during the past five years Tehran built an average of around 75,000 units per year. 30 Ali Akbar Gholi Zadeh, "Demands for housing asset," Journal of Planning and Budget, Tehran: 1999­2000. 31 Following the increase in inflation in 1994­95, households in Tehran sold or traded down their homes for cheaper alternatives and spent the surplus income on consumption needs (Naghsh Jahan Pars Consulting Engineers, Tehran Municipalities, Project of Organizing the South of Tehran, Tehran: 1998). 24 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy Khouzestan built only 7,000 units per year, and many other less populated provinces built fewer than 5,000 units per year. 49. As noted before, based on the estimation of income and employment multiplier effects and forward and backward linkages, the investment assumed between 1998 and 2004 to meet final demand for housing in these years, will generate an additional IRR 122,430 billion worth of output from other economic sectors, create 623,400 jobs, and raise GDP by more than 1 percent.32 It is uncertain to what extent additional direct or indirect income from housing activities will result in additional consumption spending. Insofar as employment is generated mostly in the low-income groups (which have higher propensities to consume and lower tax rates to pay than high-income workers), we shall assumed a large multiplier effect. It appears that the restricted availability of affordable housing for low-income groups may result in this group losing out on housing wealth; with gains accrued mostly among the relatively high income groups. Therefore, the distributional impacts of reform, as far as the low-income groups are concerned, may be largely restricted to increased employment.33 50. Although the plan does not break down the new supply of housing by income group, as a rough approximation it can be assumed that social units (of less than 50 m2) will target low-income groups, supported units will target the middle-income groups, and the high-income groups will have access to free units, namely, those built by the private sector. If this is the case, then analysis of the reported figures for the first three years of the plan suggests that the overall targets for new housing units built has been met. The social housing share, however, is only 7­9 percent of the units built; the target was 13­18 percent. Supported housing turned in a similar performance; more private-sector free houses have been built than were budgeted. 51. So the restricted availability of affordable housing for the poor may produce even fewer opportunities for them to make housing gains. Any gains, in fact, will go to the higher-income groups, making the distributional impact of reform, for the poor, largely restricted to greater employment opportunities. The only way to improve assistance to low-income groups would be to emphasize the construction of social and supported dwellings. Unfortunately, as mass producers tend to build toward the middle-income groups, it is unlikely that they would be interested in even less profitable projects. One possibility worth investigating is whether the government could create more incentives for the construction of smaller rental properties. Current rental laws provide no additional tax incentives for units smaller than 120 m2. 32Local experts consider this estimate to be low due to inappropriate definitions in the input -output table, particularly concerning the prices of crude oil. 33This is based on the assumption that `social' units will target low income groups, and based on the fact that the social housing share of annual new housing supply has been only 7­9 percent of the units built compared with a target of 13­ 18 percent. 25 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy 4. Policy Issues 4.1. Characteristics of the Housing Sector 52. Urban demographic pressure. During the early years of the Revolution, households responded to government calls and incentives for larger families, with the result that the population grew at a rate of 3.7 percent in the mid-1980s, up from 3.1 percent in the mid1970s. They also responded to promises of free land and housing, causing the urban population to rise from 46 percent in the mid-1970s to 53 percent in the mid-1980s and to 61.5 percent in the mid-1990s. These demographic pressures have created major housing and employment challenges for the Iranian government, which has also been contending with a housing sector changed in fundamental ways by the Revolution. As the population burgeoned, Article 31 of the Islamic Republic Constitution made it "the right of every Iranian individual and family to possess housing commensurate with his needs." 53. Although population trends have eased recently in Iran (the growth rate is down to 1.4 percent), a disproportionately large cohort of young Iranians is demanding jobs, housing, and other services within this and the next decade.34 The annual rate of new urban household formation (about 375,000 in 2000­01) is currently superior to the number of new urban units produced across cities (350,000 in 2000/1). In parts of large cities like Tehran, families are doubling up at an increasing rate in the existing housing stock. In other words, because of the Iran-Iraq war and the postwar baby boom, Iran's housing stock of 198 units per 1,000 residents is low by international standards (Table 1- 6). Table 1-6. Basic Housing Indicators Indicator Iran Values (2000­01) International Range Share of total investment (%) 54 11 to 38 Share of GDP (%) 8.8 2.0 to 7.7 Share of value added--construction (%) 4 3­6 Share of value added--real estate services (%)a 11.7 9­14 Stock of units per 1,000 198 265­440 New units per 1000 5.4 2.1­10.4 Notes: (a) Real estate, specialized, and professional services. Source: International values are based on UN/ ECE data for industrial countries from 1960 to 1980. 54. A supply-driven government response. In response to increased need for housing, the government has adopted a largely supply-driven housing strategy. Using a redistribution-before-growth paradigm, the government responded to needy households with an urban land redistribution program and the provision of "social" housing (defined as units of less than 50 m2), mainly through mass production.35 By the mid-1980s, this approach proved unsustainable: the rationing of housing and land ensued, creating typical problems. Significant but piecemeal housing reforms were instituted in the decade that 34 Iran Statistical Yearbook, 1378 (March 1999­March 2000), Tehran: Iran Statistical Center, 2001. 35 Since the budget law of 1994­95 was passed (1373, Article 52), Iranian housing policies divide markets into three segments: "free," "protected," and "social" housing. Protected housing comprises units under 75 m2 of floor space in Tehran, Isfahan, Tabriz, Shiraz, and Mashad, and 100 m2 in other cities. Social housing refers to units under 50 m2. 26 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy followed; some were intended to moderate demand, mostly through population-planning programs gradually reversing incentives to migrate to urban areas and modifying subsidies and tax incentives. Other reforms sought gradually to reduce the government role in the direct supply of housing and to encourage the use of the banking sector as a main conduit for subsidies. 55. Analyses suggest that the quality of housing has improved during the past decade. Moreover, in the past few years, the government has met annual housing production targets by increasing the allocation of budget and nonbudget resources (land and so forth.) to the housing sector and increasing reliance on the private sector in construction. As indicated above, however, housing supply still lags behind need. Furthermore, a highly skewed income distribution, rising housing and transportation costs, and rising cost of finance (small savings and limited possibility to further mobilize resources) have resulted in a significant deterioration in affordability,36 particularly for the lower half percent of the population. According to different estimates, the house price-to-income ratio in Tehran varies between 6 and 8--high by international standards. 56. Mismatch between supply and demand. A significant increase in housing supply since 1996­97 has resulted in a housing stock of 12.2 million (March 2002); 8.1 million in urban areas and 4.1 million in rural areas.37 Based on estimations of 13.8 million households, the current household density may be approaching 1.13, significantly close to the 1.12 density target of the Third FYDP.38 These national averages, however, obscure important geographical and income-related differences in housing conditions. According to the 2001 household survey, about 69 percent of the households in urban areas own their homes (and generally also the land) but ownership is only 55­58 percent of low income households (the bottom 40 percent in the income distribution--with annual expenditure below IRR 9m) compared to 64­79 percent for the rest of the population. 57. Taking into account the population that is economically active, it has been estimated that there is a total effective demand of about 570,00039 units per year to which about 113,00040 units per year for the next three years should be added, to the extent that the government intends to reduce household density to 1.12 by the end of the Third FYDP. An estimate for the low income groups suggests that its need for housing during 2000­04 is slightly over 1 million housing units, around 30 percent of annual total demand (Table 1-7). Actual effective demand may be smaller if the gradual reduction of subsidies on core goods such as fuel, energy, and food, planned to commence in FY2002, 36It has been estimated that housing purchasing power per household ranges between 28 m˛ for the first income decile to 226 m˛ for the last. Once the number of persons per household is taken into account, housing purchasing power per capita drops to 9 m2 for the first income decile and to 46 m2 for the last. 37Population and Housing Statistics 1976-2002, Tehran: Planning Bureau, MHUD, 2003 38Population has been estimated as 64.9 million as of March 2002--41.9 million in urban areas and 23 million in rural areas. 39Assuming no changes to household size and household density, it has been estimated that an additional 889,000 units will be added to the demand for housing in the next 5 to 10 years as the baby boomers mature (approximately 89,000 units per year). This increases effective demand to approximately 569,000 units per year. Obviously, this demand will be higher if household density is reduced to 1 and household size is temporarily reduced to 2 (for newlywed couples). 40Currently there are 1.63 million households sharing accommodation--resulting in a need for 340,000 households (at the current household size of 4.79). 27 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy is indeed implemented. This will have a major impact on housing affordability in Iran, particularly for the low-income groups, and consequently on effective housing demand. Based on our estimations, the share of housing expenditure may decrease by 14 percent for low-income groups, 13 percent for middle-income groups and 2 percent for high- income groups, and on average, the demand for housing may be reduced by as much as 12.5 percent. Housing purchasing power may also be reduced in the case of reduction of subsidies. For instance, a middle-income household (in the fifth decile) may see its housing purchasing power drop from 72 m2 to 63 m2, the current housing purchasing power for a low-income household (in the fourth decile).41 58. Based on the estimated housing purchasing power42 of 28 m2 for the low-income groups, these households are able to afford only accommodation classified as "social" in the development plan. The planned supply of this accommodation, however, ranges from 66,000­133,000 housing units per year from 1999­00 to 2003­04, just 45 percent of the accommodation needed by these groups. This situation is worsened by the fact that no more than half of the planned social housing was built during 1999/00­2000/01. Clearly, the existing incentives do not result in sufficient accommodation built by the private sector or by the mass producers. According to some estimates, at least 7 percent of housing construction is carried out by 100 percent State-Owned-Enterprises (SOEs). The actual total involvement of the public sector, however, may be significantly higher as a large proportion of the government's intervention is carried out in some form or another through quasi-public enterprises, foundations, and cooperatives43. Table 1-7. Need for Housing by Low Income Groups in Iran (2000­04) Year Number (thousands of units) Requested investment (RI b) 1999­2000 146 7,665 2000­01 175 11,287 2001­02 211 15,192 2002­03 250 19,500 2003­04 292 24,747 Total 1,074 78,391 Source: Naser Nikooseresht, "The Main Issues in Housing Market: Policies, Strategies, and Implementation" Tehran: (BHE, No. 32), 3­10, 2002 59. Segmented markets. The picture that emerges is of three segmented markets along income lines: the rich (with incomes in the top 20 percent) obtain housing through wealth-driven and speculative investments; middle-income and formal-sector employees obtain housing mainly through government-subsidized programs (which supply "protected" and "social" housing; see n. 1); and lower-income housing is built either 41Source: World Bank estimates based on consultants reports. 42Taking into account the 2000­01 average rental price per m2 of housing of IRR 5,827/month, housing purchasing power per household ranges from 28 m˛ for the first income decile to 226 m˛ for the last. 43There are no statistics available on the share of these foundations in the supply of housing. Bonyad Maskan (Housing Foundation) and Bonyade Panzdahe Khordad (5th June Foundation) directly provide some housing, especially in rural areas. Based on an unpublished report prepared by Bonyad Maskan in 1990, the share of these foundations in construction of housing was less than 1 percent. 28 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy through self-help or incremental house construction. It has been declared "unauthorized" as it falls outside formal housing definitions and plans. 60. The demand in these markets is met in different ways and to different extents. The high-income groups made housing expenditures of nearly 40 percent of all housing expenditure by all groups (Table 1-8). Around 60 percent of new housing supply was affordable only by this group (accommodation with more than 100 m2). In contrast, the low-income groups (the bottom 40 percent) had housing expenditures equivalent to only 20 percent of all housing expenditure and could afford only 8 percent of the units built during the Second FYDP (accommodation with less than 50 m2). Housing affordability deteriorated for the low-income groups. This situation does not appear to have improved during the Third FYDP. Of the units targeted for low-income groups during the first two years of the Third FYDP, only half were built. 61. It appears that the restricted availability of affordable housing for low-income groups may result in their losing a share in the available housing wealth. Any gains have been accrued by the relatively high income groups. Thus, the distributional impacts of reform, insofar as the low-income groups are concerned, may be largely restricted to increased employment. Table 1-8. Mismatch between housing supply and demand (share of supply by income group, percent) Low Income Middle Income High Income Total (Bottom 40%) (Middle 40%) (Top 20%) million m2 Of m2 Of affordable Of m2 Of affordable Of m2 Of affordable accommodation accommodation accommodationa First FYDP 20.6 13 39.4 31 40 56 175 Second FYDP 19.7 8 39.9 32.6 40.4 59 188 Notes: (a) Affordable accommodation is defined as those with less than 50 m2for the low income groups; between 50 to 100 m2for the middle-income groups; above 100 m2 for the high income groups. Source: Estimated using square meters derived from housing expenditures from the Expenditure and Income Survey of Households, Tehran, Iran Statistical Center, various years. 62. Centralized housing policies. Despite significant progress made by the policies pursued in the current and previous development plans, the housing sector continues to rely heavily on government subsidies and persists in inefficient allocations of land and capital in city development. Decisions on supply of land, infrastructure, and housing have been highly centralized. Iran faces six major challenges: · the housing finance market is underdeveloped and governed through central bank credit allocation; · the supply of serviced urban land remains constrained and distorted by large public land allocation policies; 29 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy · the sector remains heavily subsidized (3­6.5 percent of GDP in 2000­01)44 through direct and indirect subsidies, most of which are poorly targeted; · quasi-public construction companies receive preferential access to credit, land, and regulatory protection from private sector competitors;45 · rigid city boundaries and their management have resulted in a proliferation of informal settlements in and around major cities;46 urban planning is centralized and controlled by the Ministry of Housing and Urban Development (MHUD); · relatively insignificant empowerment ofmunicipalities has constrained their ability to address issues impairing the proper functioning of local housing markets.47 63. An unfavorable macroeconomic context. Housing problems are bedeviled by macroeconomics. Iran has contracted its own case of the "Dutch disease,"48 which in the Netherlands prevented the economy from diversifying into nontraditional exports and export-substituting industries. Volatile land and real estate markets are other symptoms of this economic ailment. Statistics suggest that on average over the past decade about 40 percent went into housing, although statistics on urban housing investment49 as a percentage of total investment are not available for Iran. Nevertheless, considering the degree of urbanization in Iran (64 percent in 2000­01), it is quite likely that a significant percentage of total investment went into urban housing. In the absence of this information, however, the inverse relationship can be seen between housing prices and total investment (i.e., net capital account) over the period 1986­2000 (Table 1-9). Thus, it appears that for those years when tighter foreign exchange controls were imposed (e.g., 1996­97 and 1999­00) and lower foreign exchange left the country, housing prices increased because of higher speculative demand and reduced the net capital account.50 In addition, available studies51 on the relationship between inflation and the net capital account have estimated the (general) price elasticity of the net capital account to be 0.8. 44The latter figure includes 3 percent for housing utility subsidies. 45Although quasi-public companies are less powerful in the housing sector than in public works/engineering. 46A decade ago, city planning and zoning became quite flexible and developers were able to obtain several times the "approved" density. City boundaries, on the contrary, have remained fixed, reducing land supply. This planning function does not cover the urban periphery, where the informal settlements are prolific. One of the reasons for this situation is that in Iran, unlike in many other countries, the municipal boundary is limited to the city itself. The sum of the area covered by municipalities is a very small percentage of the total national territory. 47Recent developments have granted more power to municipalities in Iran (e.g., after city councils receive nominations for Mayors from the Ministry of the Interior, the councils directly elect the mayors). In addition, a policy of financial self sufficiency by municipalities has been pursued by the government (e.g., only 8 percent of 2000 revenues in Tehran municipality were transfers from central government). In the absence of alternative revenues, most of the municipalities' income has been generated from sale of land and densities. Thus, the opportunity to utilize land and density as policy instruments to create an efficient housing market has not been realized. Land and density are seen as revenue earning assets. 48Max Corden made the first formulation of the dynamics of "Dutch disease" in 1984. See Peter Neary and Sweder van Wijnbergen, eds., Natural Resources and the Macroeconomy (Cambridge: MIT Press, 1986). 49Using the construction activities of the private sector in urban areas (published by the central bank) as a proxy, 2000­ 01 expenditures on land and buildings for started, semi-completed, and completed buildings amounted to IRR 44,282 billion. Rural housing is a very complex issue in its own right and therefore is not the object of this chapter. 50The correlation coefficient between the net capital account and the housing price index was estimated as ­0.6 based on consultants reports. 51Rahimi Broujerdi, "Effective Factors on Capital Flight," Tehran: Central Bank of Islamic Republic of Iran, 1999­ 2000 30 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy Thus, a 1 percent change in the capital account will result in a 0.8 percent change in inflation. 64. Recent economic developments in Iran, however, show that the oil sector continues to shrink relative to the rest of the economy, that the service and agriculture sectors are generating much of Iran's economic growth, and that volatility will persist as long as domestic demand (increasingly less dependent on oil revenues) and private consumption continue to fluctuate. The declining importance of oil revenues is a major accomplishment in its own right. Nevertheless, falling oil prices are likely to continue having an impact on public and private consumption and investment spending. More recently, oil price increases in 1999­2000 have helped the economy somewhat, signs of which are seen in annual GNP growth rates of more than 6 percent. Table 1-9. Relationship between Housing Prices and National Investment (1982 prices) Year Househol Consumpt Net Average Average Housing Goods General Housing Net ds (`000) ion (RI b) saving household household price and inflation inflation capital (RI b) consumpti savings index services rate rate account on (RI th) (RI th) price (US$m) index 1986 96,723 6,459 79 667 8.1 163 167 23 20 2,541 1987 9,886 6,074 334 614 33 202 214 27 26 1,245 1988 10,103 6,119 ­46 605 ­4.5 259 275 29 25 1,220 1989 10,324 6,298 112 610 10.8 305 324 17 17 2,624 1990 10,551 7,523 534 713 50 328 353 9 7 4,539 1991 10,787 8,276 1,030 762 95 391 422 21 19 6,032 1992 11,091 8,720 1,290 786 116 476 513 24 22 5,924 1993 11,403 8,865 1,145 777 100 579 650 23 22 5,563 1994 11,722 9,089 678 775 57 683 879 35 18 ­347 1995 12,050 9,313 889 772 73 875 1,314 49 28 ­774 1996 12,398 9,644 1,362 777 109 1,179 1,620 23 35 ­5,508 1997 12,721 10,053 696 790 54 1,529 1,898 17 30 ­4,822 1998 13,051 10,738 257 822 19.6 1,818 2,244 18 19 2,270 1999 13,390 11,085 633 827 47 2,163 2,692 20 19 ­5,894 2000 13,764 11,545 1,109 838 80 2,682 3,015 12 24 ­1,091 Source: Statistics of the National Accounts of Iran, Tehran: Ministry of Finance, 1996; EconomicReport and the Balance Sheet for the years 1981­2000, Tehran: Central Bank of Islamic Republic of Iran, 2001. 65. The macroeconomic environment from 1990­01 to 2000­01--and in particular the presence of high and volatile inflation--has been hostile to the development of a market- based housing sector. Deposit rates in banks have been regulated at levels well below inflation, thus ensuring a negative return to small savers52 and a shortage of funds.53 As a result, housing finance services, paramount for the expansion of the housing sector, have become increasingly scarce.54 Macroeconomic conditions in Iran reached their worst stage in 1995­96 when CPI inflation reached 50 percent per annum. In such an 52When inflation was low during 1990­92, positive returns were offered to savers. 53Due to a higher Reserve Required Ratio (RRR) until 1998­99, the banks had fewer funds available for lending. 54The scarcity of finance is correlated with a large gap between regulated bank rates and free market curb rates. 31 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy environment, market-based, long-term housing finance was unaffordable to potential homebuyers and the housing finance system could not expand in real terms. Low purchasing power associated with the low productivity and high unemployment rates was an additional factor obstructing the development of the sector. Since the mid-1990s, better macroeconomic policies across the board are improving the environment. Nominal lending rates have finally become higher than inflation for the first time in 2000­01, and positive deposit rates are already attracting more savings into the banking system.55 66. An underdeveloped finance sector in Iran, combined with inflation, has rendered housing the preferred asset for accumulating household wealth. This in turn gave rise to a speculative housing market, fueling not only housing-sector booms but also accentuating recession periods. This represents a certain danger for Iran's economy. Indeed, the role this sector has played in creating economic crisis has come to light only recently-- namely after the Asian crisis, and in particular, the case of Thailand. 4.2. Iran's Housing Challenge 67. Demographic pressures 56 point toward a rapidly increasing demand for housing and housing finance during the present decade. As the annual rate of new urban household formation (about 375,000 in 2000­01) is currently superior to the number of new urban units produced across cities (350,000 in 2000­01), growing numbers of families are doubling up in large cities like Tehran. 68. In response, the government's housing strategy has been largely supply-driven and has emphasized the expansion of the supply of "social" housing (of less than 50 m2) mainly through mass production.57 A highly skewed distribution of income, however, has raised housing and transportation costs and the cost of finance by limiting both savings and the ability to mobilize resources. These factors have adversely affected affordability,58 particularly for the bottom half of the population. As explained before, this situation proceeds from the macroeconomic and financial environment of significant inflation, financial repression, and very limited access to housing finance--an environment that has prevailed for more than a decade. Demographic pressures are not likely to translate into effective economic demand because of the following factors: · Low purchasing power. Gains in real household purchasing power during the 1990s have been negligible and real wages have been eroded by inflation (i.e., the wage 55Iran is not a low-saving country. The aggregate savings rate fluctuates at around 30 percent of GDP. 56Iran's population pyramid is marked by an unusually large demographic bulge of young people who will be entering the housing markets during the next 7 to 10 years. Annual population growth rate has declined very significantly during the 1990s, but was still high at 1.67 percent in 2000­01. Iran's population growth still remains above the average growth rate of 1.5 percent p.a. for middle-income countries during the period 1990­98 (World Development Indicators, Washington DC: The World Bank, 2000). 57Since the budget law of 1994­95 (1373, Article 52), Iranian housing policies divide housing markets into three segments: "free" housing, "protected" housing and "social" housing. "Protected" housing comprises units under 75 m2 of floor space in Tehran, Isfahan, Tabriz, Shiraz, and Mashad, and 100 m2 in other cities. "Social" housing is defined as units under 50 m2. 58It has been estimated that housing purchasing power per household ranges from 28 m˛ for the first income decile to 226 m˛ for the last. Once the number of persons per household is taken into account, housing purchasing power per capita drops to 9 m2 for the first income decile and to 46 m2 for the last. 32 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy index remained below inflation during the past decade). Per capita GDP has risen slowly and remains 25 percent below what it was in 1976. · Skewed urban income distribution. Iran has a skewed urban income distribution by international standards, despite its improvement over the past decade. Rural-urban and interregional disparities are large, although in the urban sector the income distribution is slightly better and has improved during the past decade. The ratio of urban deciles D10/D1 was 16.5 in 1992­93 and improved to 14.3 in 1999­00. The ratio of quintiles Q5/Q1 was 8.7 in 1992­93, moving down to 7.9 in 2000­01. Some 18 percent59 of the urban population is below the poverty line. · Low levels of ownership affordability. The triple combination of a skewed income distribution, high price-to-income ratios, and a small housing finance system with housing loans capped at IRR 50 million is cutting off access to homeownership for a majority share of the population in large cities, particularly for young households. In Tehran a housing unit with 75 m2 of floor space was estimated to cost IRR 168 million in 2000­01 ($21,300). The loan maximum yields a low loan-to-value ratio of 30 percent which is not manageable for most families. In the other large cities of Esfahan, Mahsad, Shiraz, and Tabriz the price of a similar 75 m2 unit was estimated at IIR75.8 million. In these markets, the loan-to-value ratio becomes a more reasonable but still difficult ratio at 66 percent, as most households cannot afford a 34 percent down payment without the help of their families. · Rapidly rising rents. Those households that cannot gain access to home ownership must rely on rental markets or double up with other families. Rents in Iran appear to be rising even more rapidly than housing prices. These trends reveal important imbalances between housing demand and housing supply, especially in major cities. Security deposits are very large (about two years of rent or more) reflecting high inflation, the reluctance of banks to extend loans, and a likely preference for curb market arrangements by landowners given present financial market conditions. This tends to make the rental market more regressive and more dependent on prior wealth for young households60. 69. As a result, after a decade of housing reforms and major government efforts, 20 percent of Iran's population, the lowest-income group, has little access to adequate housing. Despite concerted government efforts to reduce income inequality, low-income groups continue to see their purchasing power erode. The housing sector continues to rely heavily on government subsidies. Urban planning continues to make inefficient allocations of land and capital. Future reforms must address these constraints, in particular: 59The urban poverty line in 1378 (1999­2000) was set at IRR 854,410 or approximately $110 per month. 60Overall unemployment rates in the European Union from 1990 to 1998 reached its lowest (3.9 percent) when a substantial proportion of housing (about 40 percent) was provided in the form of rental accommodation. Similarly, when unemployment reached 22.9 percent, rental accommodation constituted only about 15 percent of the housing market. Indeed, there is evidence linking the elimination/reduction of private rental markets with high unemployment rates. Gordon Hughes and McCormick estimated an increase in unemployment by 1.5 percent n the 1990s due to the elimination of the private rental market (See EU Economic review, European Economy, Luxembourg: Office for Official Publications of the EC,1987). 33 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy · the supply of serviced urban land remains constrained (see Chapter 2); · the sector remains heavily subsidized through direct and indirect subsidies, most of which are poorly targeted (see Chapter 3); · the housing finance market is underdeveloped and governed through central bank credit allocation (see Chapter 4); · a large percentage of the construction sector's capacity is in the form of informal microenterprises, or SMEs, which cannot grow because quasi-public construction companies possess preferential access to credit, land, and regulatory protection (see Chapter 5);61 · rigid city boundaries and their management have resulted in a proliferation of informal settlements in and around major cities;62 and · municipalities have not been empowered to address issues related to its municipal housing markets63. 5. Current and Future Affordability of Housing 70. A major policies of the Third FYDP, yet to be implemented, include the eventual elimination of subsidies. This gradual process (eliminating the subsidy system for core goods such as fuel, energy, and food), was to commence in FY2002. If implemented, the reform will have a major impact on the housing affordability in Iran, particularly for low- income groups. 71. The objective of the section below is to provide an estimate of the impact of reduced subsidies on affordable housing and consequently on effective housing demand. Household expenditures on rent for 2000­01 by income deciles are used as a proxy for housing expenditure to estimate the ability to pay in m2 (housing purchasing power).64 All other expenses such as gas, water, and electricity have been excluded. 72. Trends in Housing Expenditures by Income Group. On average, 35 percent of household expenditures in 2000­01 went to housing, compared with 34 percent in 1994­ 61Quasi-public companies are less powerful in the housing sector than in public works/engineering. 62A decade ago, city planning and zoning became quite flexible and developers were able to obtain several times the "approved" density. City boundaries, on the contrary, have remained fixed, reducing land supply. This planning function does not cover the urban periphery where the informal settlements are prolific. One of the reasons for this situation is that in Iran, unlike in many other countries, the municipal boundary is limited to the city itself. The sum of the area covered by municipalities is a very small percentage of the total national territory. 63Recent developments have granted more power to municipalities in Iran (e.g., after city councils receive nominations for Mayors from t he Ministry of the Interior, the councils directly elect the mayors). In addition, the government has pursued a policy of financial self-sufficiency by municipalities (e.g., only 8 percent of 2000 revenues in Tehran municipality were transfers from central government). In the absence of alternative revenues, most of the municipalities' income has been generated from sale of land and densities. Thus, the opportunity to utilize land and density as policy instruments to create an efficient housing market has not been realized. Land and density are seen as revenue earning assets. 64All income and expenditure data was taken from the Iran Statistical Yearbook, 1379 (March 2000­March 2001), Tehran: Iran Statistical Center, 2002. 34 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy 95. Low-income groups saw their housing expenditures rise from 37 percent to 40 percent of total household expenditure, while housing expenditures stayed roughly the same (at 34 percent) for the middle-income groups, and decreased slightly from 27 percent to 26 percent for the high-income groups (Annex 1.2). 73. Price indices for the past decade reveal that these changes in the housing budget reflect price increases. Indeed, the average household expenditure increased from IRR 3 million in 1991­92 to IRR 20.7 million in 2000­01. As the consumer price index increased from 422 in 1991­92 to 2,940 in 2000­01 (Annex 1.1), the average household expenditures, in 1982­83 prices, remained stable at IRR 0.7 million in 1991­92 and IRR 0.71 million in 2000­01. Similarly, housing expenditures at constant prices have remained stable at IRR 250,000 and IRR 252,000 respectively. 74. As expected, high-income groups spend considerably more than other groups (Table 1-10). In 2000­01, low-income households spent on average IRR 3.6 million per year on housing, while high-income households spent IRR 14.1 million. For example, low-income groups incur 15 percent of all households' expenditure and 19 percent of expenditure on housing, while high-income groups incur 44.4 percent of all households' expenditure and 38 percent of expenditure on housing. Thus, on average, a household falling in the top 10 percent income bracket spends 15 times as much as a household in the first-income decile. A high-income household spends 3.9 times more on housing than low-income households, a significant decrease from 1991­92 (4.8 times). This expenditure gap is wider between the richest and the poorest households. The top 10 percent households today spend 7.8 times more on housing than the poorest 10 percent.65 75. Affordability Trends. A study66 of three cities confirms that the ratio of housing price to household expenditure for an average household has improved since the mid- 1990s, when it was as high as 10 in Tehran. Currently the ratio is estimated to be somewhere between 6 and 8. This improvement is mainly due to the lower growth rate of housing prices in the long term compared with the growth rate of household expenditures and incomes. Despite this, access to housing for the lower-income groups has gradually been reduced because the proportion of housing finance as percentage of the housing value is too small, requiring large individual savings. Additional research67 shows that an urban middle-income family (mostly salaried employees) needs an additional 25 years' savings to purchase a housing unit today. In 1978, the same family could afford to build its house with nine years' savings and today it needs 34 years (these estimates have not been verified by the World Bank and the large change may be due to inflation). 65The 2001­02 Gini coefficient equals 0.42. This coefficient decreased from 0.45 in 1995­96--used to be 0.38 in 1986­87 (Annual Report of the Plan and Budget Organization, various years). 66 Ali Chegani, The Financial Affordability of the Household in Procurement of Housing. A case study on Tehran, Isfahan, Kermanshah, and Arak Cities, BHE, Tehran, Bureau of Planning and Economics, NHLO, 2001. 67See "The necessity of housing mass production from the point of view of household affordability," Housing Mass Production, No. 1, Tehran: 1379 (2000), 12­18. 35 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy 76. Given an average rental price per m2 of housing of IRR 5,827/month (2000­01),68 it has been estimated that housing purchasing power per household ranges between 28 m˛ for the first income decile to 226 m˛ for the last (Table 1-10--column 5). Once household densities are taken into account, housing purchasing power per capita drops to 9 m2 for the first income decile and to 46 m2 for the last. 77. Affordability varies widely from region to region. Annex 1.3 shows an analysis of housing markets in Iran for the six most densely populated provinces, Tehran, Esfahan, Mashad, Tabriz, Shiraz, and Arhwaz. It concludes that Tehran has the lowest housing purchasing power across the board, except for households in the top 30 percent of the income distribution; their housing purchasing power increases sharply, to about 65 percent, in relation to the households just beneath them on the income scale. On average, Fars has the highest average housing purchasing power at 79 m2 in comparison with Tehran (61 m2) and Esfahan (65 m2), and it also has the highest housing purchasing power for low- and middle-income households. Both Fars and Esfahan show extremely high housing purchasing power for the top 10 percent of the households. 5.1. Subsidy Reductions and Their Impact 78. The Plan and Budget Committee reported to Parliament in June 2001 that subsidies on energy (US$12 billion) and food (US$4.4 billion) for FY2000 amounted to US$16.4 billion, 20 percent of GDP; of these, 12 percent were subsidies to petrol (at US$0.05/liter), a large proportion of which went to high-income households. On average, Iranian households currently (2000­01) receive IRR 1.12 million each per year worth of subsidies for food, gasoline and electricity, broken down as follows: · RI 645,000 worth of direct food subsidies, which corresponds to 9.5 percent of households expenditure on food (RI 6.8m)--direct subsidies for wheat amount to IRR 6,566 billion and for other foodstuff amount to IRR 1,692 billion69; · RI 187,000 worth of direct and IRR 13,000 worth of indirect gasoline subsidies ­ current gasoline price is IRR 450/lt and excludes IRR 550/lt of budgeted subsidies in the 2001­02 Budget Bill,70 which corresponds to 122 percent of price per liter and 8.5 percent of households expenditure on transportation (RI 2.34m); · RI 273,000 worth of direct electricity subsidies--current electricity price is IRR 125/Kw while the cost of generation and distribution is IRR 250/Kw--a 100 percent price differential71 and 4 percent of household expenditure on lighting and fuel (RI 6.69m). 68Value is the average for the first half of 2000 of rental transactions reported in the questionnaire distributed to real estate agents by the Ministry of Housing. 69HamidReza Vafadar,. "Estimating explicit and implicit subsidy on wheat and flour," Journal of Planning and Budget, No.18, 1376 (1997):21­39. 70Jamshid Pajouyan, "Examining the ways of cash payment of the subsidies on gasoline," Ettelaat Political-Economic Monthly, no.169, 1380 (2001): 248­58. 71Yadollah Sabouhi, "Optimum recognition of energy sources," Plan and Budget Journal, special issue on the Third Development Plan, 1376 (1997): 52­76. 36 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy 79. The above figures show the extent to which subsidies on food, gasoline, and electricity have propped up household budgets and the likely effect of their elimination. But household budget pressures will vary from decile to decile. For example, it has been estimated that when energy subsidies are cut, expenditures in the first four deciles will increase by 27 percent, in the second four deciles by 26 percent, and in the two upper deciles by 24 percent72. Similarly, the impact of housing subsidy reductions varies from decile to decile. A one-percentage-point increase in food prices will reduce the share of housing expenditure among low-, middle- and high-income groups by 0.23 percent, 0.19 percent and 0.05 percent respectively (Table 1-11). Table 1-10. Urban Households: Housing Affordability, 2000­01 Current situation If subsidies are reduced Decile Total Expenditure Share of Housing Household Per capita Share of Expenditure Housing expenditure on rent rent purchasing size housing housing on rent purchasing (RI m) (RI m) expense power (person) purchasing expenditure (RI m) power (percent) (m2) power (m2) (percent)a (m2) 1 4.9 1.96 40 28 3.05 9 33.2 1.62 23 2 8.7 3.11 35.4 44 3.94 11 31 2.69 38 3 11.4 3.78 33.1 54 4.38 12 28.8 3.28 46 4 14 4.47 31.9 63 4.56 13.8 27.5 3.85 55 5 16.6 5.1 30.7 72 4.72 15.2 26.7 4.43 63 6 19.5 5.7 29.2 81 4.7 17.2 25.4 4.95 70 7 23.3 6.7 28.7 95 4.93 19.2 25 5.82 83 8 28.5 8.1 28.4 115 4.96 23.1 24.7 7.03 100 9 37.4 9.9 26.4 141 5 28 25.8 9.65 138 10 74.5 15.8 21.2 226 4.93 46 20.7 15.42 220 Average 25.3 6.75 26.6 96 4.52 21.2 23.2 5.87 84 a. Reductions in subsidies are proxied by a reduction in housing expenditure. The new share of housing expenditure is estimated after the following price changes are taken into account: For low-income--Foodstuff and beverages: 37 percent; Clothing and footwear: 27 percent, Housing: 4 percent; Household furniture and furnishing: 27 percent; Transportation and communications: 27 percent; Other items: 27 percent. These price changes are reduced by 1 percent for middle-income groups and by 3 percent for high-income groups. Theses changes are the sum of those shown above for food, transportation and lighting and those estimated by the MPO in Yadollah Sabouhi, "Optimum recognition of energy sources," Plan and Budget Journal, special issue on the Third Development Plan, 1376 (1997): 52­76. Source: Iran Statistical Yearbook 1379 (March 2000­March 2001), Tehran, Iran Statistical Center, 2001, and Fardin Yazdani, "A review on the efficiency of market performance in urban areas," BHE, Tehran: Bureau of housing planning and economics, NLHO, 1380 (2001). Table 1-11. Housing Expenditures, 1976­2000: Price Elasticity of the Share of Urban Household Income Food and Clothing and Housing Household furniture Transportation and Other decilesa beverages footwear and other furnishing communication goods Low ­0.23 ­0.24 ­0.92 0.092 0.17 ­0.19 Middle ­0.19 ­0.16 ­0.74 0.045 0.12 ­0.182 High ­0.05 ­0.09 ­0.2 0.032 0.08 0.12 a. Low-income: first four deciles; Middle-income: second four deciles; High-income: the latter two deciles. Source: Fardin Yazdani, "A review on the efficiencyof market performance in urban areas,"BHE, Tehran: Bureau of housing planning and economics, NLHO, 1380 (2001). 72 This estimation appears to imply that they have the same size units and size of families, when in reality they do not. See Sabouhi, "Optimum recognition of energy sources", Plan and Budget Journal, special issue on the Third Development Plan, 1376 (1997): 52­76. 37 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy 80. Assuming price changes for goods and services (to proxy reduction of subsidies), the share of housing expenditure decreases 14 percent for low-income groups, 13 percent for middle-income groups, and 2 percent for high-income groups. On average, the demand for housing may be reduced by as much as 12.5 percent. Housing purchasing power may also be reduced once subsidies are cut. For instance, a middle-income household (in the fifth decile) may see its housing purchasing power drop from 72 m2 to 63 m2, the current housing purchasing power for a low-income household (in the fourth decile). 81. Affordability will be worsened by the indirect effect of subsidy reductions caused by increased construction costs and, quite likely, increased housing prices. It is estimated that about 30 percent of construction costs concerning construction materials will suffer a tenfold increase (see background paper on the Construction Sector). 5.2. Implications for Government Policy 82. According to the Plan and Budget Organization, more than 20 percent of urban Iranian households live below the urban poverty line, corresponding to a 2000­01 annual income of IRR 10.5 million. Despite the growth in per capita incomes over the past decade, the quality of life for Iran's poor has not improved. On average, total expenditure for the low-income groups, in 1982­83 prices, has remained relatively stable at around IRR 0.3 million . By way of contrast, total expenditure for the high-income groups has increased from IRR 2.2 million to IRR 2.5 million. 83. The reduction/abolishment of subsidies in an inflationary environment will worsen the living conditions for the poor. Preliminary estimates73 suggest that reduced subsidies may cause effective demand for housing to fall by 12.5 percent, particularly by low- and middle-income groups. It is understood that the government intends to develop a social security mechanism to protect the vulnerable from the consequences of mass unemployment and from the planned reduction of state subsidies. 84. To start, the government should consider a less fragmented approach to social housing. The overall efficiency of these programs will improve when (a) objectives and instruments are better harmonized, (b) operating roles74 are more efficiently allocated among institutions, and (c) there are more incentives to leverage competition and private markets, notably to build housing units and to mobilize the capital for long-term finance. 85. Government assistance to low-income groups could be improved with greater planning emphasis on social or supported dwellings for purchase or rental. Unfortunately, as mass producers tend to build for middle-income groups, an increased supply of affordable units is unlikely. Still, there might be ways to increase the supply of affordable 73Source: World Bank estimates based on consultants reports. 74These roles include: Setting social housing priorities; allocating and monitoring various housing subsidies; funding credit capital and/or interest rate subsidies; providing banking services; acting as an institutional investor; conducting building and development activities through subsidiary companies. 38 Iran--Strategies for the Housing Sector Chapter 1: The Housing Sector in the Economy rental properties for this sizable population of low-income households. Perhaps Iran could formalize the role of the country's real estate agents and improve the country's tenancy laws.75 This would require a review of tenancy laws and regulations. Although the rental law protecting tenants was abolished in 1999, the market has been slow to respond; the mandatory large deposits are still in force as an overreaction to laws that protected tenants' rights. This practice, however, is more widespread in the high-income groups. Therefore, a review of the legal framework protecting tenants may have a salutary effect on rental prices and conditions. 86. Encouraging investments in small rental properties, it should be emphasized, would be only a temporary solution for housing low-income groups. The market must develop two basic requirements according to law or guideline: · There are no additional tax incentives under current rental law to units smaller than 150 m2. Iran could pass laws that provide incentives to developers for much smaller properties (i.e., up to 50 m2) and for multi-unit properties. · The MHUD, jointly with the Association of Private Sector Developers, should draft regulations specifying the format and content of a "Condominium Agreement," officially prepared and registered by the private-sector developer before it can rent out individual properties. 87. In this context, future housing policy in Iran sould take the following into account: · 1st decile. The need for housing is so extensive for this decile that the government's household density targets for this group will not be possible to attain. Most households will have to rely on rental accommodations, co-habit with other families, or build incrementally in peripheral areas. · 2nd­3rd deciles. Highly subsidized social rental housing is provided by nonprofit organizations. Many households will co-habit or build incrementally in peripheral areas. · 4th­5th deciles. Home ownership for this group should be promoted; developers should receive some tax incentives. · 6th­7th deciles. Regular bank loans should be made more widely available. · Above 7th. No assistance should be provided. 75In the early 1980s, Parliament approved the Osr-va-Haraj amendment to the Law of Tenant and Landlord. The amendment allowed the courts to extend the contract period for three times on behalf of the landlord with no changes in contract conditions. The result was the increase in advance payment as well as other guarantees such as the provision of blank checks to the landlord. 39 2 The Urban Land Markets in Iran 1. Introduction 88. Land has been the cornerstone of the Iran's housing policy over the past two decades: compulsory acquisition of land in and around urban areas has allowed the state to amass vast areas of land; more than half of all the urban land supplied for housing has come from the public sector; and the biggest share of housing subsidy has come in the form of free or heavily discounted land. The objectives of such a policy have been to eliminate land speculation; supply urban land to vulnerable groups; and inhibit price increases. 89. But evidence suggests that such policies have led to unintended consequences, including higher and more volatile land prices that far exceed general inflation. Land supply also became increasingly inelastic for a number of reasons. First, instead of responding to consumer demand, public supply of land has instead conformed to the demands of successive Five-Year Plans. Second, public agencies have acquired far more land than they release on a yearly basis. Third, financing for infrastructure is constrained, further reducing supply of serviced land. Finally, inflexible land-use regulations prevent a timely expansion of city boundaries and redevelopment/densification of neighborhoods, further restricting private supply of land and giving rise to informal settlements. 90. Although Iran has instituted a number of reforms in an effort to reduce public intervention in land markets, there remains a pressing need for a clear transition strategy toward a market-based land policy, one that seeks to (i) develop the regulatory environment for an efficient land market (flexible land-use regulations, efficient transaction mechanisms and real estate services, and infrastructure supply); (ii) reduce the market power of public land by phasing out acquisition and hording of residential land; (iii) devolve land management/allocation responsibilities to local governments; (iv) regularize tenure and upgrade infrastructure in existing ,substandard settlements; and (v) address legal and management inadequacies in the system of land management and use in urban and peri-urban areas. 2. Background: Land Policy Since the Revolution 91. Building the Stock of Public Land. Three laws, which were passed between 1979 and 1987, transformed Iran's property regime, the structure of land ownership, and land market dynamics. In general, these laws restricted the amount of land held by private landowners; prohibited land transactions, except to or from the government; and established provincial Urban Land Development Organizations (ULDO), bringing under its control all land belonging to the central government and its agencies (ULDO was later replaced by the Urban Land Organization [ULO], in turn replaced by the National Land and Housing Organization [NLHO]). Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Table 2-1. Land Policy since Revolution Year of Title Relevant Provisions Enactment 1979 Urban Wasteland (Mavat) Enabling broad based acquisition: Ownership Urban land divided into two groups: wasteland and non- (also referred to as the wasteland. Owners of wasteland were granted 3 years' grace Second Urban Land Law) period to construct residential property or lose their land. 1982 Urban Land Law Expanding broad based acquisition: Non-wasteland was (also referred to as the divided into cultivated (dayer) and uncultivated (bayer). Third Urban Land Law) Owners of uncultivated land were entitled to develop up to 1000 sq meters, the rest would be assigned to the Urban Land Organization (ULO) at a price determined by the Government. Private transactions of uncultivated land were also forbidden. Cultivated land (urban farmland) in 32 cities could be purchased by the ULO. 1987 New Urban Land Law Restricting broad based acquisition: (also referred to as the Extended the ability of ULO to acquire cultivated (dayer) Fourth Urban Land Law) and uncultivated (bayer) lands for 5 years and to 48 cities. After 1992, ULO's compulsory acquisition activities were restricted to wasteland (mavat). 1992 Land Acquisition Act Regulating the acquisition of land: Provided procedure for pricing the land for plots of up to 1,000 m2: (i) the purchase price must be paid to the owner; (ii) agreement on price must be reached between parties; and (iii) in case of disagreement, a pricing committee comprising representatives of the owner, the seller and the judiciary system will decide. Procedures for purchase of plots larger than 1,000 m2 remained undefined. 2002 Residential Land Use Act Regulating the use of land: Prohibited the allocation of land without previous confirmation that its use is residential, within city boundaries (Commission Article 5) and in rural areas (Housing Foundation). 92. Large-Scale Distribution of Land. Until 1985 the ULO pursued a policy of distribution of mostly raw, undeveloped land to individual households. Although large areas were distributed through this approach, it was quickly discredited due to its lack of sustainability, inefficient use of land, and land profiteering/speculation by some of the recipients. The failure of this policy to address housing shortages (which were exacerbated by the government's commitment--spelled out in the Constitution--to home ownership for all citizens) led the Ministry of Housing and Urban Development (MHUD) in 1985 to initiate a new urban land development policy with the intention of greatly increasing the availability of developable land. With "sustainable urban development" its overarching objective, the policy intended to provide infrastructure for new residential areas (including the development of new/satellite towns), and to supply developed land to both individual applicants and construction companies and developers. 41 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets 93. Proliferation of Informal Settlements. Since 1985 new housing development has taken place largely outside previous urban boundaries. Cities, constrained by lack of local resources and a highly centralized and rigid planning system, could not cope with the demand. Today, it is estimated that some 25­30 percent of urban settlements are informal, illegal or both.76 In the Tehran Metropolitan Region, and during the 20-year period since 1976, about 40 percent of the additional 5 million Iranians have lived in informal settlements (Zebardast, 2002).77 Actual estimates of illegal and/or informal settlements are made more difficult in Iran because by law those settled on untitled lands are deemed the legal owners after 15 days of possession, unless proven otherwise. 94. New Towns as the Answer. The government's initial response to the increased demand for urban land was new towns. The New Towns Corporation was created in 1988 with the objective of building satellite towns. An ambitious program for the development of new towns began, with more than 26 new towns planned around major cities of Iran. Lack of funds, compounded by infeasible locations, reduced the number of new towns to 18. Only a few have been developed, and located, well enough to start attracting new inhabitants. A few, such as the new town of Pardis, 25 km outside Tehran, are very well located near employment centers and have attracted thousands of residents; they still lack in trunk infrastructure, which is supposed to be supplied by the New Towns Corporation. The company, which gets the land from the government, has had difficulty financing the trunk infrastructure, even though a number of construction companies and cooperatives have already purchased land for apartment buildings. 95. The First, Second, and Third Five-Year Plans on Land Policy. While the First Five-Year Plan envisioned land supply administered by the public sector, the Second Five-Year Plan sought to introduce land prices and increasingly rely on market mechanisms. The Third Five-Year Plan affirmed the liberalization of land markets. It called for the reliance on price mechanisms (Box 2-1) and on vacant land tax as a means to stem land speculation. The plan provides for NLHO to continue supplying about one- third of all needed land for urban development. It also allowed the introduction of varied land prices; the discussion below shows that land is still mostly allocated significantly below market price. 76Informal settlements are those that have not been registered but may not necessarily be illegal. Illegal settlements are in violation of the property rights of legally recognized owners. 77Esfandiar Zebardast, 2002, "Spontaneous Settlements: Perceptions and Realities," unpublished mimeo. 42 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Box 2-1. Current Methodology for Pricing of Public Land Up until 1988, public land was allocated at the same nominal price regardless of its location. Successive Five-Year Development Plans provided for a market-based approach for pricing land. There are currently five methods for allocating land: 1. Market price for small plots arrived at through bidding. This method is used to allocate small plots of land within the texture of the city. The sale is advertised in newspapers and the base price is estimated based on current market value. The buyer is usually free to develop the land within the scope of zoning regulations or transfer it to a third party. 2. Negotiated price for mass production of housing through agreement. This method is used to allocate large parcels of serviced land to housing developers. The developer is bound to implement the project per negotiated timetable. The price cannot be less than the raw cost of land plus infrastructure improvements. 3. Negotiated share of the equity. This is a form of public/private partnership in which the public sector contributes the land in return for an agreed upon share of the building. The public sector sells its share of the units at market price. 4. Discounted sale to private sector developers of rental housing. At least 10 percent of public lands allocated annually in selected cities must go for construction of private housing for rent. This method allocates land at a subsidized rate of 15-65% (inversely related to the price of land) of market value to developers of rental housing. Developers are bound to rent the housing units for at least 5 years, after which they can be sold. 5. Allocation of land to individual applicants at "cost" price. These are allocated to special categories of beneficiaries, mostly comprised of civil servants and groups supported by the government. 3. Assessing the Performance of Land Markets 96. To assess the performance of urban land markets, this section examines public land acquisition and allocation in the context of overall land supply, and land prices over the past two decades. 97. Land Acquisition. The rise and fall of land acquisition as a public land strategy (see Figure 2-1) shows that the early 1990s saw an active policy of land acquisition, with compulsory acquisition of Mavat (wasteland) land, compulsory purchase of Dayer (cultivated) and Bayer (uncultivated) lands (purchased land); and public land assigned to National Land and Housing Organization (NLHO) from other public entities and bonyads. Although trends have declined since the early 1990s, they are still substantial. In 1999, the NLHO acquired 267 sq km. To put these numbers in perspective, this is more than double the area of Paris, at 105 sq km. By 1999, NLHO had amassed vast areas of land, around 6,000 sq km (Figure 2-3). Acquisition of land by the NLHO has followed the same trend over the past two years (1999­2002). NLHO acquired 574 sq km of land of which 112 sq km were in urban areas (within city limits) and 460 sq km were in the urban periphery (see Table A2-5, Annexes ­ Chapter 2).78 In addition, only 1.1 sq km was purchased land. Ten percent of the land acquired within city limits and five percent of that acquired in the periphery was located in the 6 largest cities in Iran (see Table A2-8). 78Since March 2000, the land acquired by the government has changed classification to within city limits and between city limits and periphery. 43 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets 98. Land Supply. While the trends of supply of public land followed those of land acquisition, the quantity supplied (notice scale) has been a small fraction of land acquired for any of the years, often not exceeding 10 percent (see Figure 2-2). Furthermore, land allocation for residential use has gradually increased but remains less than half (39 percent) of total land allocation in 2000/01 (14 out of 36 sq km). Twenty-five percent of the residential land was allocated in the six largest cities in Iran. Of the residential land distributed, more than 50 percent went to individuals, an allocation method that has produced very low densities and very high infrastructure costs. Policymakers are well aware of the inefficiencies entailed in this method of land allocation. Nevertheless, in 2001/02, in spite of intentions in the Second and Third Five-Year Development Plans to increase reliance on private developers for mass housing production,79 land allocations continued to be dominated by individual transactions (see Table 2-6). Figure 2-1. Land Acquisition by Government (1979-2000) 1600 1400 1200 1000 m2 800 Million 600 400 200 0 79/0 80/1 81/2 82/3 83/4 84/5 85/6 86/7 87/8 88/9 89/0 90/1 91/2 92/3 93/4 94/5 95/6 96/7 97/8 98/9 99/0 Purchased Land Public Land Mavat Land 79Mass housing in Iran is defined as five or more units to the plot. 44 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Figure 2-2 Compulsory Land Acquisition and Land Allocation (1979-2000) 79/080/181/282/383/484/585/686/787/888/989/090/191/292/393/494/595/696/797/898/999/0 500 400 300 m2 200 Million 100 0 -100 Purchased Land Mavat Land Non-residential transfer Developers Housing Cooperatives Individuals Figure 2-3. Land Allocation by Government (1979- 2001) 100 90 80 70 m2 60 Million50 40 30 20 10 0 79/080/181/282/383/484/585/686/787/888/989/090/191/292/393/494/595/696/797/898/999/000/1 Non-residential transfer Developers Housing Cooperatives Individuals 45 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets 99. Even if we exclude public land assigned to NLHO (as it is a public-public transfer), land allocated still represents only 10­30 percent of land acquired on a yearly basis (see Figure 2-3). A possible reason for this is that most of the land acquired is on the periphery of small cities, which makes it relatively more difficult to allocate than in larger cities that develop and grow at a faster pace. Indeed, around half the land acquired in large cities is allocated, a trend that may be improving, judging from the 2001/02 land allocations: land acquired in large cities was roughly the same amount as that allocated (see Figure 2-4). Remaining to be verified, however, is the market power held by the government of Iran in the large urban land markets. Figure 2-4. Compulsory Land Acquisition and Land Allocation Six Largest Cities in Iran (1995-2002) 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 50.00 40.00 30.00 20.00 m2 10.00 Million 0.00 -10.00 -20.00 -30.00 Between Urban Limit & Periphery Within Urban Limit Non-residential Residential 100. The significance of public land allocation to overall urban land supply becomes apparent from Figure 2-5. On average, 54 percent of all residential urban land supplied from 1979 to 1997 was public. This is hardly surprising given the legal restrictions on private transactions in effect until the early 1990s. Since 1996, public land supply has been declining in both magnitude and share of total land supplied (see Table 2-1). 46 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Figure 2-5. Total area of land owned by NLHO 2,000 1,800 1,600 1,400 2m 1,200 of 1,000 millions 800 600 400 200 0 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 Figure 2-6. Public Land Allocation as Share of Total Urban Land Supplied (percent) 100 90 80 70 60 50 Percent 40 30 20 10 0 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 47 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets 101. The figures above show, first, a public sector gaining more and more control over the stock of land, especially along the urban peripheries; and, second, a declining allocation of public land for residential use. The effect of this supply pattern on prices is examined next. 102. Urban Land Prices. Until the early 1990s, private land transactions were severely constrained and public land was allocated at fixed/administratively determined prices--in other words, there was no land market or price signals to speak of. During the 1990s, land prices rose sharply as restrictions on private transactions were lifted and a highly inelastic land supply system went into effect. Oil revenues largely drove the demand for land and real estate. Only in the late 1990s, and as the Oil Stabilization Fund became effective, did land prices decline again. Still, a fivefold increase in land prices within a three-year period suggests not only highly inelastic land supply but also the impact on land prices of reduced exchange rate speculation starting in 1994­95. Although public land supply in the short term is inelastic by definition (i.e., is responding to Five-Year Plans and other considerations that have little to do with short-term changes in demand), it is clear that private supply of land did not come in to fill the gap, probably partly due to locational concentration of public land as well as other constraints (formal city limits, access to infrastructure) that affect private as well as public land. 103. Horizontal Expansion and the Rise of Commuting Costs. Eighty percent of the land acquired in the past two years (2000/1­2001/2) is located outside city boundaries on the peripheries. Thus, assuming that this trend is representative of the stock of land held by NLHO, only a very small proportion of NLHO public land is within city boundaries. This urban land is normally used as revenue-earning assets in projects for the high-income groups80. 104. The bulk of public ownership and supply has fallen outside city limits but on the urban periphery. Development projects on the periphery are preferred because low- density areas facilitate the construction process and also because there are normally fewer administrative procedures to deal with. Unfortunately, this preference has encouraged unnecessary urban sprawl; the city of Yazd has perhaps one of the worst cases of such sprawl. This has not only resulted in increasing trunk infrastructure costs (when urban densities are already low), but also in increasing commuting costs at the national level. The share of household transport expenditure has risen at a faster rate than housing expenditure between 1995 and 2000 (see Table A2-7). As transportation costs will rise sharply with the reduction of energy subsidies, illegal settlements within cities may increase. As these are expenditure figures, they do not include the real cost or the time spent commuting, which are likely to have risen at an even faster rate. 80Although this is the case for public and quasi-public organizations such as the Housing Foundation, it is uncertain whether the profits earned actually go to fund low-income housing, or if they get reinvested in the profitable activities carried out by their subsidiaries. 48 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Figure 2-7 Price Trends (1979/0-2000/1) 6,000 5,000 4,000 CPI Housing Index 3,000 Construction Materials Land Price2,000 Wages 1,000 0 1979/0 1981/2 1983/4 1985/6 1987/8 1989/0 1991/2 1993/4 1995/6 1997/8 1999/0 105. Revenue from Public Land Allocation. Although the Second and Third Five-Year Plans made provisions for a market-based approach to their allocations, most land continued to be allocated at deep discounts. The various programs range from a 100 percent discount on land cost and development (for special groups such as families of martyrs, prisoners of war, the disabled), to a 90 percent discount (for targeted groups such as young families, women-headed, and low-income households), to a 10 percent discount for nontargeted schemes. The average price of allocated public land was about US$1 per square meter in 1998­99 and dropped to about US$0.8 in 2000 (see Table 2- 2).81 In spite of these deep subsidies in public land pricing, overall land as a proportion of housing cost has continued to hover between 40 and 50 percent in the past 10 years (compared with 25­30 percent in well-functioning housing markets, see Figure 2-8). Inelastic land supply translates into high market prices of privately sold land. This, in addition to low building densities, contributes to such a high average share of land cost. 81Even if we assume that 50 percent of the land was allocated free for public services (roads, parks, etc.), the average price still would not exceed US$2 from 1998 to 1999. 49 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Figure 2-8 IRAN: Share of Land in Total Housing Cost 1971-1999 60 50 Cost 40 Housing in 30 Land of 20 Share 10 0 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 106. Bayer (Vacant) Land Tax. The government of Iran increasingly relied on Bayer land tax as a disincentive to speculative land holdings. All urban Bayer land remaining unutilized after two years, without a justifiable reason, was liable to an annual tax of 2 percent of its market value, increased to 4 percent after the fourth year. Although revenues from these taxes had increased since the early 1980s, they were still minute (less than US$1million annually). As a result, because expenses for collecting this tax were high compared with actual revenues, the government decided to stop collection--a de facto elimination of this tax. 107. Besides providing important revenues to the municipalities, taxation can help to create an efficient land market and to improve the management of land use and densities in both urban areas and on the periphery. Therefore, implementation of the appropriate land tax policies in Iran deserves careful consideration. Both assessment of market values and enforcement of collections are issues to take into account when designing land taxes. 50 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Table 2-2. Land Tax (IRR b) 1982-83 83-84 84-85 85-86 86-87 87-88 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 0.1 0.2 0.2 0.3 0.2 0.3 0.4 0.5 0.5 0.8 1.4 1.7 3.2 5.8 7.2 6.9 Source: Various sources, Ministry of Finance and Economics, Tehran: various years. 108. The Contribution of Urban Master Plans to Inelastic Supply of Land. Serviced land supply in Iran is inelastic because of rigid city boundaries and/or unavailable serviced land. The abrupt growth of the primary cities in the early 1980s as a result of rural-to- urban influx and land distribution has left a deficit of infrastructure services that continues to this day. Adding to the problem has been the government's "new towns" policy, which began in the mid-1980s to divert scarce resources away from urban peripheries and toward 26 new towns, many of which eventually proved unviable.82 City planning often followed the new towns policy by restricting development to areas within the official city limits despite the fact that migration to the cities consistently exceeded projections. The situation was further exacerbated by the lack of funds to extend infrastructure even within the city limits. 109. Limited funds for maintenance have also led to the deterioration of infrastructure in the inner cities, resulting in the familiar pattern of exodus of inhabitants to newer areas and the replacement by illegal immigrants, crime and drug activity. Reversing this process at this point requires more than physical investment in infrastructure: revitalization programs, including social services and local economic development would be needed. In addition, there is a strong case for master plans include the peri-urban areas beyond the city boundaries (i.e., zoning should apply to the metropolitan area and beyond). Most of prime agricultural lands and groundwater tables are located around cities--poorly managed expansion of the cities will have negative environmental consequences. 110. The Proliferation of Informal Settlements. The experience of Iranian cities suggests that the urban planning system has been too rigid to adapt to fast demographic shifts and that investments in infrastructure were not commensurate with the needs: land use restrictions within the city; rigid city boundaries; and the inability to extend infrastructure even within the city have resulted in the spill over of low income urban groups into the periphery, the unserviced areas, or the rundown inner areas of cities. As a result, and in contrast to many developing countries, Iran's informal settlements have more to do with their administrative status established by urban planning regulations than with property rights or housing quality: (i) illegal occupation of land and land invasion are relatively rare in Iran, and most land is bought on the informal market; (ii) construction is for the most part with permanent materials; and (iii) residents for the most part have moved from urban, not rural areas. It is the inflexibility of urban planning regulation and the inability to integrate areas on the periphery that render most of these settlement "informal." A study of 10 cities by local experts has shown that after these cities prepared and 82Due to lack of funds and lack of feasibility of many of these locations, this program has been tailored down to 18. Only a subset of these towns has been developed far enough and is located appropriately to start attracting residents. 51 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets implemented their master plans, they experienced accelerated peri-urban population growth. In all these cities, residents acquired the land for housing through the informal land market (Rafiei and Athari, 1995,83 cited in Zebardast, 2002). This is confirmed by studies of the Tehran Metropolitan Region, which have shown that largest cities of the region (except Tehran and Karaj) began as informal settlements but were granted formal city status: "Four out of the nine newly established towns during the 1991­1996 period, and eight out of nine newly established towns in 1997 were previous informal settlements. Currently there are 17 informal settlements with a population of 10,000 or more that are on the waiting list to be awarded the city status" (cited in Zebardast, 2002). 111. Few spontaneous settlements develop within the periphery. The main reason for this is that Article 100 allows the municipality to fine and even destroy, after a municipal court hearing, any illegal construction in the greenbelt area. This is not the case elsewhere, however. Regulations governing rural settlements close to the periphery are also partly responsible for the improper channeling of lands to the urban areas and effectively increasing the urban sprawl (Figure 2-9).84 4. Proposed Reforms 112. Iran's experience with direct interventions to control urban land prices is not unique. Indeed, a number of countries have experimented with various forms of "land banking" with the aim of stemming speculative activities in land markets and to keep land prices affordable. The most common model (India, Tunisia, some parts of Canada, etc.) is to create a public agency that would acquire land in urban and peri-urban areas through purchase, expropriation, or special legislation restricting land transactions. The agency would "bank" the land, safeguarding it from speculative pressure, and then release it administratively at a prescribed government price. Although land can indeed be used as an instrument for market stabilization, the unintended consequences of such policies are many and have tended to lead to the opposite outcomes from those hoped by policymakers: such public agencies typically manage to capture valuable urban or peri- urban land. But in the absence of access to infrastructure finance to service this land and release it when and where it is needed, and in the absence of price signals and corporate incentives to perform efficiently and use the land optimally, these agencies face tremendous difficulties meeting their policy objectives and also staying afloat. 113. The Option of Doing Nothing. As seen from the subsidies chapter, land represents the biggest part of the housing subsidy package, reaching anywhere from 0.3 to 0.8 percent of GDP. The wide range represents the yearly volatility in the volume of 83Minoo Rafiei and Kamal Athari, "Informal Settlements in Iran: A Survey of Causes and Solutions," UPARC, Tehran (Persian) 1995. 84There are several actors involved. The Housing Foundation, in charge of preparing the rural master plans and defining the boundaries of rural settlements. The Ministry of Agriculture is responsible for all rural land. The Ministry of the Interior (represented by the local governments) issues permits for individual housing construction outside the city boundaries (Article 6) and is responsible along with Commission 13 for new town development. The local governments can delegate their powers of issuing permits outside the city limits. In fact, some provinces have delegated this authority to the Housing Foundation. 52 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets allocated land in any single year. As the chapter on subsidies (chapter 3) clearly demonstrates, these subsidies are not well targeted; and they are not accounted for in the government budget. Perhaps the worst effect of these subsidies is the distortions they cause in the housing sector. Nevertheless, if appropriately targeted, land subsidies can play an important role in attracting developers to invest in low-income housing and in rental accommodations. As such, their role should be explored as part of a housing policy concerned particularly with the provision of low-income housing. This could be achieved through limited government intervention that is both efficient for the operation of land markets and effective in the provision of low-income housing. Figure 2-9. Commission 13 & Min Interior New Town Development Housing Foundation Periphery Ministry of Agriculture Rural MHUD and Municipality Settlement Urban Area Article 100 114. Protecting Private Property Rights. With a fresh history of an active public policy that calls for the compulsory acquisition of private land, Iran's property rights regime is, as one would expect, far from stable. Although widespread land acquisition has declined since the early 1990s, the practice still exists for unused Mavat land in urban and rural 53 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets areas. It would be difficult for a private real estate development industry to develop and prosper given the risks of expropriation. 115. Scaling Back NLHO's Role in Land Development. NLHO continues to acquire land for its housing program (more than 2,500 ha per year). The rationale for such a role needs to be questioned at this stage of market development: are there strong institutional/policy arguments for NLHO continuing the active role in land markets? or is the NLHO a relic of outdated housing policies? Possible justifications for such a role are regulatory impediments, which would prevent private developers from acquiring and developing the land. These would include the inability to amalgamate large tracts of land, or the inability to coordinate infrastructure services, or the inability to get financing for land acquisition. As part of a long-term strategy, these types of impediments should be addressed directly by regulatory, enabling reforms rather than by having the NLHO replace private developers in acquiring land. 116. While the NLHO has the mandate to manage all public land and will always need to acquire land for public purposes, these purposes need to be defined more narrowly to cover public goods (infrastructure right of way, parks, schools, etc.). It should cease to acquire, and gradually divest itself of, land suitable for residential use. It should focus on efficiently allocating the large holdings in its possession. This has to be carried out in a transparent and predictable way to reduce further market volatility, prevent the formation of private land monopolies, and provide incentives for housing production that meets pent-up demand for housing among middle- and lower-income households. A portion of current land holdings could be used as a mean to promote the emergence of a privately led land development profession. 117. Transitioning to Private-led Land Development. There is clear evidence that the private construction/real estate sector is sufficiently well developed to identify appropriate locations for low-cost housing, preferably on a small, in-fill scale. The subsidies that are now are in the form of discounted land transfers can be channeled differently: developers can compete for direct NLHO subsidies by meeting certain building standards, costs, and/or profiles of buyers and tenants. NLHO, in turn, would assist private developers by facilitating the interface with public sector institutions (infrastructure, permits, etc.). As financing of land purchase is one of the constraints sometimes faced by private developers, tenders for NLHO land could be structured as bids for equity shares, which the NLHO could then transfer to eligible beneficiaries through rent-to-own programs. Beyond access to public land, the private sector's ability to accumulate private land, subdivide, it and serve it should be enhanced. This requires streamlining procedures for land accumulation/subdivision, and allowing private sector and land owners' (individual owners and/or land associations) participation in development of infrastructure. Timely provision of water and power will continue to be a challenge in the near future given their status as public monopolies. But steps can be taken in these sectors as well to realize gains from a more competitive environment, especially in private participation in distribution. 54 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets 118. Transitioning to a Greater Municipal Involvement in Urban Planning and Land Development. The current highly centralized planning systems create a disadvantage to decision makers in accessing local information, developing participatory approaches, and enforcing urban policies. At the central level, institutional fragmentation of responsibilities over urban development makes addressing the problem more difficult. The Ministry of Housing and Urban Development (MHUD) has direct responsibility for urban planning and public land; Ministry of Interior (MOI) has direct authority over local authorities, and Management and Plan Organization (MPO) has direct responsibility for local budget allocation and management. At the city level, land management and urban development require extensive knowledge of local market conditions; these are best left to cities to manage locally. Current plans to devolve more responsibilities to local governments should aim at placing municipalities at the hub of urban development. 119. Endowed with proper planning, budgeting, and capacity-building measures, municipalities can be more responsive to local preferences and demand and can do a better job of coordinating private-sector and local community initiatives as well as supervising utility company investment programs in the areas under their jurisdiction. A prerequisite for this, and in fact for all the following recommendations, is to define appropriate roles for NLHO, MHUD, and the municipalities. Without the definition of roles, these recommendations will be difficult to implement. This, along with the explicit mechanisms to help transition to greater municipality involvement, should be carefully developed. 120. Improving Land Registration/Land Transactions Infrastructure. The transfer of ownership of land or real estate from one party to another in Iran takes two to three months if all documents are in order. This, according to interviews, represents only about 25 percent of the cases--the rest require more time. Even some large organizations such as the Housing Foundation have failed to provide title to the households involved in their programs.85 Such performance is incompatible with a modern and efficient real estate sector. Modernization of land registries in a number of developed and developing countries (electronic storage of documents and maps, the automation of processes) has cut transaction costs considerably, allowing for one-stop-shopping services and less than 48-hour turnarounds. 121. Streamlined procedures and standardized documents become increasingly necessary as financial and capital markets develop. Iran's interest in developing a secondary mortgage facility requires streamlining and standardizing all upstream procedures and documents for transferring ownership rights, mortgaging, releasing, and transferring of mortgage across financial intermediaries. The programs86 for modernizing the registration system should be supported. In particular, the work done by the National Surveying Organization reporting to the MPO, concerning Remote Sensing, GPS (Global 85By 1998, the Housing Foundation had divided 75,000 hectares of rural land into 232,151 plots. However, the Housing Foundation was given this responsibility at the beginning of the Second FYDP (i.e., 1994/95) but by 1997 it had only given out 1,626 titles. Source: Housing Foundation, Report of Activities. 86Iran has experimented in several ways to improve registration and titling. The implementation of a cadastre started about 10 years ago, but serious management problems inside the registry has resulted in little progress. Perhaps the appropriateness of having the registry under the judiciary system should be reevaluated. 55 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets Positioning System) and GIS is commendable. In addition, some municipalities, like Tehran, have been extremely successful in implementing GIS systems. 122. Monitoring Land Prices and Constraints to Land Supply. The previous section shows that land, far more than other inputs, has contributed to the inflation of housing prices. Previous experiments with restricting land transactions, expropriating land, and allocating land for free have not been clearly shown to be sustainable, efficient, or necessarily well targeted--hence the shift in policy. 123. As the share of the supply of public land decreases and that of private land increases, it becomes increasingly important for MHUD/NLHO to enable rather than control and supply residential land. It needs to monitor land prices at a local and city levels, identify any supply constraints on elasticity, such as predominance of public/waqf land in peripheral areas; lack of trunk infrastructure; city limits prohibiting further development; or density regulations preventing vertical densification. NLHO already has access to an extensive and regularly updated database of land and housing prices provided through surveying real estate agents around the country. In a market-based environment, NLHO needs to increasingly rely on this data for policy analysis and decision making. NLHO can also assume an increasing role in auditing all the policies, regulations, and procedures affecting the supply of land. 124. Managing the Supply of Serviced Public Land. NLHO should develop a market- based methodology for use by cities to managing public land supply. The methodology would use local land market prices and share of land cost in total housing cost as inputs to help determine the quantity, location, and density of public land supply. Local managers would be evaluated according to their ability to keep the share of land cost to total housing cost within a band of, say, 30­40 percent. They would manage this relation not by subsidizing land prices, but by supplying more land for development and/or by modifying the floor-to-area-ratio (FAR) allowed in a particular neighborhood. Although private developers would be relied on for supplying secondary infrastructure, trunk infrastructure will still need to be provided by public authorities. NLHO needs to play a leading role in developing a coordinating mechanism for financing and provision of trunk infrastructure. 125. Stemming Land Speculation. Many of the land policies adopted in the past have been driven by a desire to stem land speculation. As the experience of resource rich countries has shown, inflation of real estate prices is more a symptom of what is known as the "Dutch disease," where a single sector (in Iran's case, oil) dominates the economy and causes the inflation of non-tradable goods (in this case, land). The limited alternatives for inflation-proof investments in Iran add to this effect, producing a volatile land market that shadows oil revenues. Stemming this phenomenon has more to do with macro policy and capital-markets development than with land policy per se. In conjunction with appropriate macro and capital-market policies to develop investment alternatives, a well-designed and -implemented vacant land tax could reduce incentives to store wealth in land. 56 Iran--Strategies for the Housing Sector Chapter 2: Urban Land Markets 126. Tenure Regularization. As with many countries of the developing world, the government of Iran finds its policy on tenure regularization caught between wanting to regularize existing settlements and at the same time not wanting to send a signal of tolerance/encouragement of future unauthorized occupation of land. Article 141 of the Third Five-Year Development Plan provides a mechanism for regularizing tenure in informal areas through registration in exchange for payment of the market value of land. Experience from other countries suggests that residents of informal settlements gain de facto security of tenure and services over time and, especially if they already paid for land informally, have a low willingness to pay for it again. This approach is unlikely, therefore, to result in radical changes in the status of informal settlements.87 127. A recent positive development is the convergence of the previously divergent approaches of the Ministry of Interior and Ministry of Housing on the approach to informal settlements. A combined policy note was recently developed. It acknowledged that settlements should be regularized but that the process should avoid creating the perception that the official acts did not constitute a gift of land, which is unsustainable and invites further unauthorized development. This balancing act needs to be designed carefully, first, to provide the right set of incentives for residents of informal settlements to regularize their ownership; and, second, to guide future land development to be more flexible, more responsive to demand, and better suited to meet low-income housing needs and to set standards. 87See Zebardast (2001) and Rafeii and Athari (2001). 57 3 Housing Subsidies 1. Introduction 128. The government of Iran is clearly concerned about the affordability and accessibility of housing, and therefore has sought to provide assistance to many different population groups. Yet this has often led to a fragmented system marked by the absence of a comprehensive approach to subsidies. Iran's Third Five-Year Development Plan indicates that the government is seeking to move toward better-targeted subsidies. These efforts are strongly supported and could provide a great opportunity for future policy reforms. 129. Due to the fact that so many of the subsidies appear at different points in the housing process (e.g., construction, finance, purchase and ownership), subsidies appear to be both inefficient and not well targeted; only a portion reaches the targeted population. Even when assistance is provided directly to the households, it is often inaccessible, particularly to those most in need. In addition, many subsidies are general (e.g., interest rate ceilings and energy subsidies) and thus benefit more prosperous households. Since many subsidies are implicit and not accounted for, they are much larger than what appears on the government's budget. In addition, the types of subsidies (and the ways they are provided) are very inefficient. This inefficiency increases the size of subsidies and introduces some distortions in the housing sector, hindering its development. 130. This chapter identifies the major types of subsidies used in Iran, provides an assessment of their size, and suggests recommendations for policy reforms. The scope of analysis here is limited by the lack of information; because of this, the paper does not cover housing subsidies directly targeted to housing-related institutions, including bonyads, for operating or capital costs. The housing reviewed here also excludes specific types of housing, such as hostels, which are covered by other ministries. Also, Iran's housing infrastructure is not addressed, as this would require a separate study. Nevertheless, the basic findings and conclusions presented in this chapter, and on which the recommendations are based, are sound88. The chapter begins with detailed descriptions of the different types of housing assistance; then it seeks to quantify their size and to assess how well they are targeted. The second section identifies some of the secondary effects of the subsidies and their distortions. Section three draws conclusions, and the final section recommends policy reforms. 2. Housing Assistance 131. Most subsidies in Iran are indirect and nontransparent. Because of this, they are not explicitly accounted for in any budget. Therefore, quantitative analysis involves 88Due to the fact that information about subsidies is fragmented, the analyses offered here are based on certain assumptions and qualitative assessments obtained during interviews with experts in Iran. Therefore, these analyses should be considered indicative rather than absolute. Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies assessment of these invisible subsidies rather than taking the numbers from budget allocations. These assessments are based on assumptions about the limited secondary sources of data, which are measured as discounts provided or revenue foregone by the government as measured against the estimated market value of the respective assets or services. Due to lack of data, estimates on the size of subsidies were carried out only for 1999­00 and 2000­01. 2.1. Overview 132. Iran's government has sought to meet the housing needs of different population groups through an assortment of assistance programs. But these have taken a rather fragmented form--subsidies target households based on type of housing and social group rather than on income levels. Most subsidies are provided implicitly via regulatory and administrative pricing decisions. (See Annex 3.11). 133. Estimates for 1999­00 put Iran's housing subsidies at 1.5 percent of GDP, and at 2 percent in 2000­01; but these show great variation from year to year, mostly because of administrative allocations of land--how much and where and at what subsidized prices. At the higher levels, subsidies constitute nearly half the annual housing investment of 6.1 percent of GDP. When utility subsidies of another 3 percent are added, the total housing- related subsidies become rather excessive, nearly equaling the total annual housing investment. Table 3-1. Summary of Housing Subsidies Type of subsidies Estimated size Estimated size (percent of GDP in 1999­2000) (percent of GDP in 2000­01) Land 0.3 0.8 House price 0.6 0.5 Interest rate 0.4 0.4 Public housing (1999­2000) 0.1 0.1 Subtotal 1.4 1.9 Utilities 3.1 2.7 Total 4.5 4.6 Source: World Bank estimates. 134. At the same time subsidies are: (a) mostly nontransparent and unaccounted for (the government budget explicitly accounts for less than 2 percent of total housing-related subsidies); (b) inefficiently delivered (see Section 4); (c) regressive (interest rate and energy subsidies); and (d) provided through a highly fragmented system. In addition, these subsidies are provided in ways that create distortions with much broader negative effects on the economy than mere resource consumption; this is discussed in Section 4. 135. The authors studied subsidies from two different perspectives. First, what was the recipient's perspective? How did the benefits affect the recipient household? How did 59 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies the government finance the assistance? Was there an explicit cost to the government budget? Or was it an implicit subsidy in the form of government revenue foregone? 136. We found that the government made no direct transfers to low-income households for housing purposes. Nor did we find any publicly owned social housing in Iran. Public housing is provided either to public servants and public workers at sub-market rents or for sale under RTO (rent-to-own) schemes. Subsidies are provided in three main forms: · the largest land subsidies could be as high as 1 percent of GDP; · provided mainly by allocations of public land at below-market prices to different beneficiaries--developers, co-operatives, bonyads, funds, and private individuals; · housing prices are subsidized through inputs and energy costs, preliminary assessment of which indicates they could be around 0.5 to 0.6 percent of GDP; · such subsidies are obtained by limiting profitability of construction companies under government contracts and selling housing at cost; most price subsidies, however, are through energy subsidies that cut the cost of construction materials; · housing finance benefits from interest rate subsidies from both banking and non- banking institutions account for 0.4 percent of GDP; · interest rate subsidies are provided in two forms--universal caps and specific subsidies to certain households, e.g., prisoners of war, young families, low-income households, public servants, and others. Developers that meet certain requirements are eligible for interest rate subsidies for limited periods, and buyers of these units are also eligible for such subsidies under RTO schemes. Additional subsidized funds are provided via programs administered by Bonyad Maskan, Imam Khomeini Relief Committee, and other institutions. Part of the subsidies provided by interest rate caps is financed by subsidized government funding, reduced reserves, and other banking- sector instruments. 137. Every household wishing to receive housing assistance applies to the Ministry of Housing and Urban Development. Private individuals are scored in accordance with a scoring system approved by the government (see Annex 3.4). The queue is arranged accordingly--the higher the score, the greater priority that household has in the queue. Once the household's turn comes, the housing is provided with subsidies determined appropriate for the social group to which the household belongs (for details see Annex 3.3). 138. Low-income groups receive some housing assistance through some of the bonyads, or charitable organizations, such as Bonyad Shahid (Martyrs' Foundation) and Bonyad Mostazafaan, which received huge assets at no cost during the nationalization process following the Revolution. They also benefit from some government assistance. It is not possible to determine the amount of government funds that went to these institutions for housing purposes. Affiliated with these bonyads are large holding companies with many subsidiaries. For the most part, they carry out profit-earning activities funded by revenues from real-estate management and other commercial activities and donations. These 60 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies activities have grown in response to incentives for the bonyads' nonprofit objectives. Because the holding companies have been taxable since 1997­98, some nonprofit activities have reverted to the bonyads from the holding companies. Therefore, the tax subsidies the bonyads receive may not be significant because such a large share of the profitable operation is performed by subsidiaries under the affiliated holdings. In order to determine the subsidies received by the bonyads and other housing-related institutions (such as public construction companies), additional research would be required. Such research would have to separate profitable and non-profitable construction and housing from other activities. 139. Because Iran's subsidies are not targeted to household income, there is no information about the kinds of households the subsidies are reaching. It appears, however, that only a limited share of subsidies are targeted (and accessible to) lower- income households. This is particularly true, because more than half of subsidies are general, which is to say they apply to utilities, construction materials, interest rate caps, and housing prices. Hence, they are regressive. Recipient-specific subsidies would affect land, specific interest rates, and housing prices. Yet even recipient-specific subsidies may not be accessible to its intended beneficiaries because only households in the middle- to high-income deciles would be able to buy newly constructed housing and utilize interest rate subsidies. 140. Since the government appears to want to provide assistance to specific social groups rather than explicitly to low-income households, it might be more appropriate to assess subsidy targeting to those groups. Although the allocation of specific subsidies could be transparent in principle through fair application and scoring mechanisms, many targeted groups would continue to have difficulties with access, as discussed above. Hence, the issue is not so much about the makeup of the specific groups the government wants to help (e.g., families of martyrs, prisoners of war, disabled veterans, young families, families headed by women, poor households). These households need and deserve assistance. The issue is rather that the types of subsidies the government is using and how they are being channeled. The same magnitude of resources could be used more efficiently and provide better help to those in need. 141. The government of Iran has already made the first steps toward addressing some of the above issues. Some of the subsidies have been eliminated in recent years; others are scheduled for elimination in the near future. Also, the Third Five-Year Development Plan (FYDP) emphasizes the need for better-targeted subsidies, reduced land subsidies, land allocations at market prices, and phasing out housing provisions to war martyrs by the end of the plan. 2.2. Scale of Subsidies 142. Land subsidies. Taksam89 figures show that between March 1997 and September 2001 the government of Iran purchased 101,009 hectares (ha) of land; only 16,063 ha have been allocated. Of these 16,000 ha, only 6,240 ha were residential (see Annex 3.8). 89Taksam manages the database for the National Housing and Land Organization (NHLO). 61 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies Table 3-2. Public Land (in hectares) 1997­98 1998­99 1999­2000 2000­01 Land acquisition 23,195 17,871 28,393 26,020 Allocation of residential land a 1,322 899 1,140 2,879b Allocation of nonresidential land 1,395b 2,005 3,215 3,208 aThese numbers exclude allocated land indicated in column "Rent" in Annex 3.8. bData provided by the Taksam for these years are different. Source: Statistical Yearbook of Iran 2000/01, Tehran: Iran Statistical Center, 2001 143. The NHLO allocates land for different projects, to mass producers (developers), bonyads, co-operatives, funds,90 and individuals. During the past seven years more than 400,000 households have received land for housing purposes (see Chapter 2). Table 3-3. Allocation of Public Land (hectares) 1994­95 1995­96 1996­97 1997­98 1998­99 1999­2000 2000­01 Total Mass producers a 265 1,014 614 181 56 155 1,444 3,729 Cooperatives a 345 383 255 250 128 294 187 1,842 Individuals a 1,227 1,130 1,014 891 715 691 1,247 6,915 Total b 1,547a 2, 891a 1,883 1,322 899 1,140b 2,879b 12,561 a. Numbers for these years provided by Taksam differ from those provided in the Statistical Year Book of 2000­01 and sum of the above equal 1,837 for 1994­95 and 2,527 for 1995­96. b. Numbers for these years provided by Taksam differ from those provided in the Statistical Year Book of 2000­01. Source: For disaggregated data World Bank estimates based on consultants' reports. Statistical Yearbook of Iran 2000/01, Tehran: Iran Statistical Center, 2001 for annual totals. 144. Three types of prices exist for allocations of public land (for allocation procedures, see Annex 3.7). · The 1980 price (estimated at close to zero in current market values) for Special Groups, e.g., martyrs, prisoners of war, and disabled veterans (also Ghadir Project). In addition, Special Groups receive 100 percent discounts on land development costs. · The regional price (estimated to be around 20 percent of current market value) for young families, households headed by women, and low-income households (also Ghadir Project).91 · The "expert" price (90 percent of current market value) for construction of housing under RTO schemes. 90There are four recently established funds--Youth, Teachers, Workers, and Guardian (see Annex 2). Another proposal to establish a new housing fund is currently in the process of being prepared by the Ministry of Housing and the Central Bank that would operate similarly to the already existing funds. Bonyad Maskan and NHLO also would like to establish a fund also for improvement of rural housing. 91Low income for 2001­02 has been defined as a household with monthly income of less than IRR 570,000 (US$ 71). 62 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 145. No data are available on the values of land allocated for housing construction and at what prices; more research is needed. Some rough estimates can be made, however, based on the assumptions described below. 146. Average land price per square meter in 2000­01 has varied between IRR298,000 (US$37) in Ardebil and IRR1.89 million (US$236) in Tehran.92 For the sake of initial assessment, we attempted to calculate the weighted average price of land by applying the average price in the capital of the ostan (province) for the land allocated in the respective ostan; such prices were available for 19 of 28 ostans and accounted for 94 percent of land allocated. For those ostans where price was not available, we applied the lowest price of IRR298,000 (US$37). This produced a weighted average price of IRR1.2 million (US$150). But the actual weighted average price is expected to be lower because:93 (i) government land is sold in large plots for prices per m2 that are 20 to 40 percent lower; (ii) plots are located primarily on the outskirts of towns, where prices are 40 to 50 percent lower; and (iii) some land has been allocated in smaller towns and more rural areas. This lowered the estimated price used in the calculations to IRR400,000. The study also assumed that the average discount on the allocated land was 58 percent in 1999­00 and 40 percent in 2000­01.94 Based on these assumptions, the estimated land subsidies were IRR1,240 billion (US$155 million), or 0.3 percent of GDP in 1999­00 and IRR4,600 billion (US$ 0.6 billion) or 0.8 percent of GDP in 2000­01. Additional information95 (see Annex 3.7) would indicate much larger subsidies, which may exceed 5 percent of GDP in 2000­01. However, these data require more study.96 147. As calculations for these two years already indicate, land subsidies are extremely volatile. They depend on the volume of allocated land in any single year--which varies significantly--and on the value of such land. The more than a six fold increase in subsidies from 1999 to 2001 was mainly because the total volume of allocated land increased by 152 percent in 2000­01, this in comparison with 1999­00. Moreover, 47 percent of this land was in Tehran for 2000­01, versus 10 percent in 1999­00, and land prices increased significantly. 148. Utility subsidies. Iran's highly subsidized energy prices translate into highly subsidized housing utilities;97 in fact, utilities are probably the largest housing-related subsidy in Iran, accounting for more than 3 percent of GDP. 149. The following are assumptions used for purposes of calculation: 92Iran Statistical Year Book, Tehran: Iran Statistical Center, 2001. 93Source: World Bank estimates based on consultants reports. 94 Weighted average assumed an allocation price of 20 percent of market value to private individuals and 90 percent to developers and co-operatives. 95Source: Bank estimates based on consultants reports. 96 See Annex 7, showing the total government revenue from land allocation was IRR367 billion in 1999­01 and IRR409 billion in 2000­01, which would indicate average revenue per m2 of IRR8,212 96and IRR6,708 in the two years, respectively. Hence, the average discount from the assessed weighted average market value of the allocated land is much larger than assumed 50 percent. Based on these data, the assessed annual subsidy would be IRR5,279 in 1999­ 00 and IRR34,260 billion in 2000­01 or 1.3 percent and 5.9 percent of GDP respectively. 97See Fetini (1999) 63 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies · Market prices on water, electricity, and natural gas are assessed at 31, 117.6, and 260 percent higher than the current prices respectively;98 · Breakdowns of utility expenditures for different services are not available, so it is assumed that electricity counts for 50 percent of utilities consumption and that the other 50 percent is split between water and gas, which leads to a combined index of 132 percent99 increase; · Because total household expenditures on utilities are unavailable, an estimate was made by multiplying average household expenditure by the number of households (see Annex 3.10.). These data on household expenditures were available for 1999­00 and 2000­01; as were data on the number of households in 1996­97. Annual rates of growth for urban households were estimated at 4 percent; rural household growth rate was set at 1 percent.100 150. Based on the above assumptions, utility subsidies in 1999­00 would be IRR13,367 billion101 (US$1.7 billion) or 3.1 percent of GDP. In 2000­01 these subsidies would be IRR15,641 billion (US$2 billion), or 2.7 percent of GDP. 151. Housing price subsidies. Housing price subsidies are estimated to reach 0.5 to 0.6 percent of GDP and are obtained through: (a) the sale of housing built at cost under government contracts; (b) limiting the profitability of government construction contracts at 10 percent (nominal) versus estimated market rate of return on housing of 30 to 50 percent;102 and (c) implicit energy subsidies to construction materials. 152. Because publicly built housing is sold rather than allocated for free, the government subsidy takes the form of foregone revenues on the sold housing--excluding land and land development costs discussed above. In the absence of information, any assessments of the size of the subsidy are based on several assumptions, described below. 153. For the purposes of these calculations, we used nominal rates of return of 20 and 40 percent.103 We also assumed that the final sales price of the publicly constructed housing would include construction costs at 100 percent and a government administration fee of 7 98See Fetini (1999) 990.25 x 0.31 + 0.25 x 2.60 + 0.5 x 1.176 = 1.32 100Source: World Bank database, 2001. 101Average urban household expenditure on utilities in 1999­00 was IRR779,834. Number of households = number of households in 1996­97 x 1.04^3 = 7,948,925 x 1.04^3 = 8,941,460. Total estimated urban expenditure on utilities = IRR779,834 x 8,941,460 households = IRR6,973 billion (b). Subsidy to urban households = IRR6,973 b x 1.32 = IRR9,173 b. Average rural household expenditure on utilities in 1999­00 was IRR701,656. Number of households = number of households in 1996­97 x 1.01^3 = 4,410,370 x 1.01^3 = 4,544,009. Total estimated rural expenditure on utilities = IRR701,656 x 4,544,009 households = IRR3,188 b. Subsidy to rural households = IRR3,188 b x 1.32 = IRR4,194. Hence, total estimated subsidy = IRR9,204 b + IRR4,209 b = IRR13,367 b. 102A survey of 100 developers in Tehran indicated that profit rates there are even higher and may reach 60­80 percent. 103Under the government scheme the expected market return of 30­50 percent is split between the contractor (10 percent) and subsidy (20­40 percent). 64 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies percent.104 However, these calculations do account for the time value of the money and assume that investment and revenues take place in the same year, whereas the actual time difference between two events could be two to four years. Based on these assumptions, the estimated subsidies would compose 0.01 to 0.04 percent of GDP. Table 3-4. House Price Subsidies (RI b)--RTO 1996­97 1997­98 1998­99 1999­20000 Government construction costs --RTO 64 183 227 564 Foregone revenue (i.e., subsidy) a 13­26 37­73 45­91 113­226 Government admin. costsb 8 23 28 70 Net subsidy to the recipients as percent of GDP <0.1 <0.1 <0.1 <0.1 a. Foregone revenue is calculated by multiplying construction costs by rate of return of 20­40 percent. b. Six percent of the expected total value of the housing units, which, assuming land costs to be equal to 40 percent of the total price of a unit, is estimated to be IRR132, 378, 469 and 1,166 billion for each of the respective years. Note: Because house price subsidies to public rental housing are provided in the form of discounted rents, only housing built under RTP scheme is covered in the table. Such housing is sold to the recipients at completion. Source: government budget and World Bank estimates. 154. Energy subsidies on construction materials are assessed based on extensive work on energy subsidies in Iran by Fetini (1999)105. His estimates indicate that raising oil prices to the market level would increase costs of construction and/or renovation by 11.7 percent. Subsidy on the total annual housing investment of IRR20,577 billion (US$ 2.6 billion) in 1999­00 and IRR26,786 billion (US$3.4 billion) in 2000­01 would be 0.5 percent and 0.6 percent of GDP respectively. This would correspond to the respective increase in housing price of 5 to 6 percent (with a ratio of construction costs at the total of approximately 50 to 60 percent).106 155. Subsidies to finance. Iran has a two-tier subsidy for housing finance: (a) retail interest rate subsidies made available to borrowers and (b) wholesale subsidies to financial institutions through public funding, reduced reserve requirements, and other measures. Since the latter subsidies are assessed in more detail later in this volume (see Chapter 4), this chapter focuses on retail subsidies to the borrowers. 156. Interest rate subsidies are provided in two forms: first, a profit-rate cap established for the banks and applicable to all borrowers of housing loans; and, second, an additional interest rate subsidy, available to specific types of borrowers--including Special Groups, public servants, and teachers. Special interest rate subsidies also go to developers in the event they meet certain criteria; these are usually available and/or passed over to the buyer as well, if the house is financed by a loan under an RTO scheme. 104In an example provided by a developer as a typical one, the total costs of construction and land per m2 was equal IRR750,000 (US$ 94), out of which IRR50,000 (US$ 6) or 6.7 percent of the total were for government administrative costs. 105Habib Fetini, Economic Aspects of Increasing Energy Prices to Border Price Levels in the Islamic Republic of Iran, Washington DC: Unpublished World Bank Document, August 1999. 106Iran Statistical Year Book, Tehran: Iran Statistical Center, 2001. 65 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 157. At the estimated market interest rates of 23 to 30 percent,107 the implicit subsidies instituted by interest rate caps are between 4 and 15 percent, depending on the size of the housing and participation in savings scheme (see Table 3-2). In the absence of information on the structure of the housing loan portfolio, a 17 percent housing loan was assumed, for the purposes of calculating the weighted average interest rate cap; the market rate was set at 25 percent. Based on these assumptions, the estimated subsidies imposed by interest rate caps would compose 0.4 percent of GDP. 158. The housing loan portfolio was estimated based on the total loan portfolio-- classified as loans for "Housing and Construction" as of the end of 2000­01--applying the same ratio assigned by the Central Bank of 20:9 (housing versus construction). As clarified by the Central Bank, housing loans include housing construction loans, while construction loans are non-housing. Based on the total outstanding housing and construction loan portfolio of IRR39,915 billion (US$5 billion) as of the end of 2000­01, the estimated housing loan portfolio would be IRR27,527 billion, or US$3.4 billion. 159. The following table shows the additional interest rate subsidies to specific groups (see also Annex 3.3.): Table 3-5. Interest Rates and Interest Rate Subsidies (percent) Recipient Additional interest rate subsidy Final interest rate Developers 6 or 8a 9­11b Special Groups108 11­15 b 4a Teachers 10 a 7­9b Public servants 4a 11­15 b Rural and post-disaster housing 7­11b 8a a Fixed b­Calculated Source: NHLO, unpublished information 160. The above subsidies are explicitly budgeted, and paid from, a national budget via a refinancing mechanism with a delay of at least one year. In accordance with NHLO guidelines, 360,000 households received such subsidies in 2000­01 at an estimated total amount of IRR150 billion109 (US$19 million), or 0.03 percent of GDP for those years. 161. Hence, the total interest rate subsidies in 2000­01 (explicit and implicit) would compose 0.4 percent of GDP. Such subsidies create contingent liabilities for the 107Interest rates on loans to industries with no profit rate caps are 23 percent, while the bazaar rate on housing loans was indicated to be around 30 percent. In the interviews with banks, possible market rates on housing loans could be estimated at around 25 percent. 108Households of martyrs, prisoners of war, and disabled veterans. 109There are 180,000 households receiving IRR75 billion in 2000­01 under supervision of NHLO. In accordance with NHLO there are another 180,000 households receiving interest rate subsidies under the supervision of the Ministry of Education. Since the loan amount is not dependant on the household's income, but rather set administratively, it was assumed that interest rate subsidies received by teachers under supervision of the Ministry of Education in monetary terms could approximate those under NHLO supervision. Hence, the total estimated amount is IRR150 billion. 66 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies government. Even if they were eliminated today, government liabilities would continue over the next 10 to 15 years. As indicated by the NHLO, the contingent liabilities of the government for loans granted by financial institutions as of the end 2001­02 are estimated to be IRR978 billion (US$122 million). 162. Subsidized housing finance also is provided through the programs administered by institutions such as the Imam Khomeini Relief Committee (IKRC) and Bonyad Maskan. The former charitable organization provides housing and housing maintenance services among other activities to targeted households, including low-income households, households with a disabled member, households headed women, and students. It also provides loans for self-construction of houses and house maintenance. Many of these activities are financed by government. In 2001­02 the government allocated IRR170.5 billion (US$ 21 million) for these activities. Even though funds are provided as loans, they are repayable only insofar as households are able; as a result, the repayment ratio has been negligible, as indicated by the IKRC. Additional implicit interest rate subsidies are provided by charging no interest rate on these loans. The total subsidies, including interest rate subsidies accounting for IRR43 billion or US$ 5.4 million (at 25 percent market interest rate), provided via this mechanism would be less than 0.1 percent of GDP (around 0.04 percent). 163. Bonyad Maskan administers several government-funded programs that offer implicit interest rate subsidies on loans to targeted households. The government also offers special support to specific groups of households, such as public servants. These take the form of additional funds that are available through the Bank Maskan for lending to participants in the savings scheme. In the absence of information, however, it is not possible to assess the size of subsidies provided through these mechanisms; the small volumes of lending, leads one to assume that these subsidies are very small relative to GDP. 164. Subsidized public housing. As of the end of 1998­99 there were almost 200 thousand housing units provided to public servants and public employees such as military, teachers and others at highly subsidized rents. Table 3-6. Public Rental Housing 1995­96 1996­97 1997­98 1998­99 1999­2000 Housing units 170,000 175,810 181,160 190,330 193,934 Area (m2) 18,870,000a 19,163,290 19,202,960 20,174,980 20,537,610a Average rent (RI m2) 500 560 1,500 1,500 n/a Estimated market rent (RI m2) 5,990 7,198 8,524 10,494 12,891 aThese numbers seem to be inconsistent when compared with those for other years. Source: World Bank estimates based on consultants reports. 165. Although estimated annual rent subsidies do not appear to be significant-- composing 0.1 to 0.16 percent of GDP--the per-unit subsidies appear to be very high, constituting as much as 45 to 75 percent of estimated market rents. For the purposes of 67 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies these estimates, the simple average of market rents in 21 cities was calculated (see Annex 3.9). Since total rental costs comprise both monthly payments and a deposit, a conservative opportunity cost of deposit was calculated using a 14 percent annual interest rate on a one-year deposit.110 166. Tax subsidies. A small property tax, no longer in force, was established after the Revolution, perhaps in 1980. It provided very modest revenues for the Ministry of Finance and Economic Affairs. The municipalities collected a council tax (comprising several fees, duties, and the like)--estimated to account for a rather small fraction of the expected current market value of any property. Significant amounts of potential revenue, in short, are left uncollected. Some municipalities like Tehran have therefore found other revenue sources, such as selling density.111 There is a related issue. Taxes can be an efficient housing policy tool. Taxes on capital gains and on properties can be used to deter speculation and to encourage selling and renting of unused properties; for example, 10­15 percent of the properties in Tehran's northern neighborhoods are vacant. These taxes would very likely be more efficient than taxes on vacant units, which are not collected in practice, and the recently abolished vacant land tax. In addition, many countries use the property tax as a main source of local government revenue. In the case of Iran, the income from property taxes is so low, and the collection mechanism so inefficient, that local governments do not even bother to collect them. Often, construction permits are the only remaining source of revenue for local governments. As a consequence, ineffective tax instruments produce even greater price distortions in the issuance of such permits. 167. Other housing-related tax subsidies have been identified: · Public servants may withdraw the entire installment of the housing loan repayment from their taxable income. · Special income tax exemptions are provided on income from rental housing in the following two cases--(i) 150 m2 in large cities and 200 m2 elsewhere; (ii) properties of more than three units of less than 75 m2 in a single block in the five largest cities, and 100 m2 elsewhere. · Transfer of tax exemption is available on the first sale of low-income housing that meets the following characteristics: (i) in cities with more than 250,000 inhabitants, projects with ten units and more with average unit size of less than 75 m˛; (ii) in other cities, five units and more with average unit size of less than 100m˛; (iii) and elsewhere, projects with three units and more with average unit size of less than 100m˛; · A transfer tax on nonexempt properties is calculated from the price set by the government, which is 10 percent of the actual market price; thus, the 5 percent rate of this tax corresponds to 0.5 percent of the actual market price. 110Source: World Bank estimates based on consultants reports. 111A shift in the Major's policy on Teheran towards the prohibition of selling density has resulted in a proposal to increase council tax by 15 times. 68 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies · General corporate income tax in Iran is progressive, depending on income ranging from 12 to 54 percent, and has the same structure as the individual income tax. Developers of multi-apartment units receive a preferential tax treatment. Under a progressive system, the tax rate would increase with the number of units owing to higher taxable income. Therefore, a new system was recently implemented; it provides for a flat tax rate per housing unit. In addition, income per unit is calculated based on a matrix (by types of materials and location); the government sets standard prices per m2. These prices are, however, much lower than average prices reported by the Statistics Bureau. The implicit tax subsidy has not been estimated. 3. Targeting Subsidies 3.1. Overview 168. In Iran, the housing sector comprises three population groups: (a) the high- to medium-high-income households that require no government assistance; (b) medium- income groups requiring limited assistance; and (c) low-income and poor households, which have limited access to "social" housing (also see Chapter 1). In Iran most of the public housing assistance is provided to the first two groups of households; only limited share is provided to lower-income ones and even then tend to be inaccessible to the poor. 169. Housing subsidies are provided based on the type of housing or social group of the household, and subsidies are not tracked by the recipient's income level.112 Also, it is important to remember that the government of Iran provides no explicit subsidies to low- income households; instead, it has identified special groups--low-income households are one of these several groups. We will first assess how subsidies are targeted, then review how the government of Iran targets low-income households. Some of Iran's direct assistance for housing is supplied by the Imam Khomeini Relief Committee, Bonyad Maskan, the Ghadir Project, and public housing programs. Some of the land subsidies appear to be reasonably well targeted, except the recipients are not necessarily lower- income households (this is particularly true with public housing and land subsidies). 170. Despite that, more than half the subsidies--interest-rate caps, energy subsidies, and subsidies for land and housing prices--are regressive--even with respect to recipients specifically targeted by the government. Also, the interest-rate subsidies, even if directed to eligible beneficiaries, remain inaccessible to many of them, particularly those in lower income deciles. Only new construction is eligible for housing price and interest rate subsidies, and these properties are more expensive by far than comparable existing or second-hand units. Hence, lower-income population groups receive these subsidies only in the unlikely event of choosing and somehow affording more-expensive housing. 112While application forms require to provide household's income, it is not clear how reliable these data are ­ some so not include this information. 69 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 171. To assess how well the subsidies target low-income households, two perspectives were used: first, eligibility requirements for recipients (i.e., government scoring), and second, types of subsidies. Each is discussed below. See Table 3-10 for of the distribution of subsidies by type of household; assessments are described in more detail in sections 3 and 4 below. Table 3-7. An Overview of Targeting of Subsidies Type of subsidy Estimated level of targeting Land Insufficient information on the recipients of land at discounted prices makes reasonable assessment impossible. Developers and co-operatives could be receiving as much as two-thirds of subsidies. In terms of affordability, it seems that at the estimated large discounts on land prices, it would be accessible even to those in the lowest deciles of income distribution. Utilities 9 percent are estimated to be provided to the lowest quartile of income distribution, while 32 percent are estimated to be provided to the highest quartile. Housing price Due to energy subsidiesa --It is estimated that 1.76­3.6 percent of these subsidies are targeted to households likely to fall in the lower deciles of income distribution (Ghadir Project, housing provided by Imam Khomeini Relief Committee, post-disaster and rural housing through Bonyad Maskan) --2 percent of these subsidies go to those receiving housing built under government contracts Finance Specific interest rate subsidies (accumulated since inception)b --12 percent received by developers --28 percent by government employees --27 percent by special groups (expected to be in lower deciles of income distribution) --18 percent "supported" housing (see discussion in the text) --15 percent for rural households Subsidized It is not expected that those eligible for public housing (public servants and employees) public housing would be households in the lowest deciles of income distribution, but are probably in lower middle-income groups. Tax subsidies Most tax subsidies are expected to be captured by developers and investors rather than passed on to households. Tax subsidies provided by income-tax deduction of mortgage loan installments are available only to those public servants who are able to borrow. Hence, it is highly unlikely that those in lower deciles of income distribution receive them. Notes: (a) No detailed analysis was carried out because the estimated housing price subsidies are very small (0.03 percent of GDP) due to limited profitability on government contract. (b) Annual data on specific interest rate subsidies are not available. Insufficient information made it impossible to assess distribution of subsidies via interest rate caps. 3.2. Scoring 172. The scoring system assigns housing assistance priority. It does not target assistance specifically to the low-income households. Scoring consists of eight parameters (see Annex 3.4), only one of which relates to income and accounts for 16 percent of the total score. Two other parameters--women-headed households and Special Groups accounting for another 19 percent--tend to place these households in lower deciles of income 70 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies distribution and, hence, could be indirectly linked to income. Those receiving assistance have an average score of 17 to 18 out of 31 total possible points; one accrues points by other parameters such as number of years residing in the area, membership in a co- operative, number of children, and keeping a savings account, all of which are not even specific to the social groups the government says it is seeking to help. In addition, only 25 to 45 percent of subsidies are recipient specific and could be allocated through this or any other scoring mechanism (such as those applied by Funds, IKRC, or other groups). 173. A limited review of household application forms from nine provinces (Chahar Mahal va Bakhtiyari, Ilam, Hormozgan, Golestan, Kerman, Gilan, Azerbayjan Gharbi, Khorasan, and Hamedan)113 indicated that the average annual income of applicants was IRR7.2 million (US$900), which is around the second decile of urban and fourth decile of rural household expenditure. At the same time it was indicated that these data might not be very reliable and misrepresent the real situation. 3.3. Targeting of Specific Subsidies 174. Although they can create a heavy initial burden on the budget, up-front subsidies are easy to control and alleviate long-term contingent liabilities to the government. They also are easy to target and adjust to the macroeconomic and housing market conditions as these change. Such subsidies have been used in several developed countries, including Belgium, Spain, and Finland. Chile reorganized its housing policy in the late 1970s and developed a system of up-front subsidies to compensate for high real interest rates on mortgage loans, which is also very much the case in Iran. 175. Following Chile's example (box 3.1), several Latin American countries (Costa Rica, El Salvador, Uruguay, and to some extent Mexico) transformed their traditional subsidy systems into direct subsidies. Close attention ensures that these subsidies are well targeted and progressive (i.e., the lower the income, the larger the subsidy). 176. Tax deductions are one of the most popular supply-side subsidies. When used as demand-side incentives, they are considered rather inefficient and regressive. Developers can be encouraged to produce low-cost housing through tax subsidies for building lower- cost and smaller housing; particular attention would be paid to the provision of low- income rental housing and the avoidance of ghettoization. More specifically, early steps could change the requirements that limit housing size in order to receive benefits by applying size limits to each unit, rather than as a project average. Further lowering of this limit should remain under consideration. 113Source: World Bank estimates based on consultants reports. 71 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies Box 3-1. Up-front subsidies in Chile In 1977­78 the government of Chile substantially altered its housing policy by reducing its direct involvement in providing low-income housing. It shifted much of the initiative for housing construction, and administrative responsibility, to the private sector. The new system involved public expenditures in the form of up-front subsidies and allocated most of the responsibility for arranging construction and financing to the private sector. The up-front subsidies were established to compensate for high real mortgage interest rates. The following three housing programs, for different levels of household income, evolved in Ch ile: --The Progressive Housing Program provided private developers with minimum housing units (up to 14 m2) on a plot of land serviced by the government. A small share of the costs was financed by the household from either savings or a mortgage loan, and a large part was provided as an up-front subsidy by local governments. --In the Basic Housing Program, private developers built small housing units (40­45 m2) under government contracts; the purchase was financed by the household's savings and a Housing Minis try loan granted on market terms. Resale of the unit was restricted for five years. --The Unified Subsidies Program offered households an up-front subsidy based on a scoring mechanism pegged to household savings; households obtained additional financing in the form of mortgage loans from commercial banks. This system allowed an important development of housings production in Chile. Between 1990 and 1997 the annual number of started construction of housing units increased by 68 percent and the area of housing built increased by 12 percent. Source: World Bank Project Staff Appraisal Report for Chile Public Sector Housing Project; November 30, 1984. 177. Land subsidies. In the absence of detailed information, several assumptions about the distribution of subsidies were made. Until 2000­01 most land was allocated to individuals; in 2000­01 57 percent of the land was allocated to mass producers and co- operatives. Assuming that individuals receive an 80 percent discount and developers and co-operatives only 10 percent, then in 2000­01 majority of subsidies (almost 85 percent) would be received by private individuals and 15 percent of subsidies would be received by developers and co-operatives. Based on the numbers in Annex 3.8, however, it appears that most land subsidies go to developers and co-operatives. Even if it is assumed that all payments for the land were made by the mass producers and co-operatives (i.e. private individuals received their land for free), 44 and 66 percent of the total estimated land subsidies in 1999-2000 and 2000-01 respectively would be received by the mass producers and co-operatives. 178. In principle, land allocation prices for individuals are estimated very low and, hence, are affordable even to those in lower-income deciles. Still, there is no information to help in assessing how these subsidies are targeted--either to the intended recipient or to low-income groups. 179. Utility subsidies. Utility subsidies are regressive by nature and most are captured by the higher-income households due to their higher levels of energy consumption. Based 72 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies on annual household expenditures for light, fuel, and water by income decile (see Annex 3.10.) and assumptions described earlier in section on utility subsidies (Housing Assistance, Section) the lowest quartile of income distribution receives only 9 percent of utility subsidies; 32 percent are captured by those in the highest quartile of income distribution. Table 3-8. Distribution of Utility Subsidies by Income Deciles (2000-01) 1 2 3 4 5 6 7 8 9 10 Urban households Average annual household 288 476 577 658 782 835 977 1,068 1,143 1,472 expenditure on utilities (RI th) Estimated annual subsidy (RI th per 380 626 759 866 1,029 1,099 1,285 1,405 1,504 1,936 household)a Subsidy received (percent of total) 3 6 7 8 9 10 12 13 14 18 Cumulative subsidy received 3 9 16 24 33 43 55 68 82 100 (percent) Rural households Average annual household 250 448 557 658 739 852 943 1,079 1,312 1,775 expenditure on utilities (RI th) Estimated annual subsidy (RI`000 329 590 732 866 972 1,121 1,241 1,419 1,726 2,335 per household) Subsidy received (percent of total) 3 5 6 8 9 10 11 13 15 20 Cumulative subsidy received 3 8 14 22 31 41 52 65 80 100 (percent) Notes: (a)Average household expenditure on utilities x 1.32. Source: World Bank estimates based on consultants reports. 180. Housing price subsidies. The largest share of housing price subsidies goes toward construction costs owing to below-market energy prices (discussed above). Housing programs that appear more oriented to low-income recipients--for example, the Ghadir Project, the Imam Khomeini Relief Committee,114 or post-disaster and rural programs through Bonyad Maskan comprised only 1.8 (2000­01) and 3.6 percent (1999­00) of total annual housing construction. Hence, even if other programs supply more low- income housing, the proportion of housing price subsidies reaching those in the lower deciles of income distribution is expected to be negligible--less than 5 percent. Recipients of post-disaster assistance, as assessed by the Housing Foundation, are households in the lower deciles of income distribution. 114Housing built under Ghadir Project and by Imam Khomeini Relief Committee cost IRR20­30 million (construction costs only, but land, at least for those eligible for housing under these programs, is probably provided at close to zero cost). Most of the housing provided by IKRC is provided at no cost of the recipient. Housing under Ghadir Project, however, is provided with loans. Based on optimistic assumptions that those in the first decile of expenditure distribution (due to lack of data on income distribution, expenditure distribution is used instead.) are able to pay 30 percent of their income for housing loan, at 4 percent interest rates (some of those eligible under Ghadir Project-- martyrs, prisoners of war, disabled veterans, etc.--are eligible for loans at 4 percent) they would be able to borrower IRR16 million. In order for them to be able to save the remaining IRR14 million it would take six to seven years at 20 percent savings rate. 73 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 181. Another form of housing price subsidies--provided by limiting the profitability of government-funded construction contracts--also does not appear to be received by those in lower deciles of income distributions. Annual numbers of government housing budgets in 2000­01 and 20001­02 indicate that only 1 and 0.6 percent of government housing budgets in the respective years was allocated specifically for low income hosing (see Annex 3.6.). Another 10 and 4 percent respectively were allocated for housing for recipients who could be expected to belong to the lower deciles of income distribution-- housing for former prisoners of war and war refugees, rural housing, and war-damaged housing. At the same time, civil servants, public employees, military personnel, and seminary students have been allocated a large share of the housing subsidies (at least 47 and 65 percent in the respective years). Although there is no information on the income of recipients of housing built under government contracts, and it is not clear what shares go for rent and purchase, one suspects that a negligible share of these subsidies go to low- income households. 182. Finance Subsidies. Based on the information provided by NHLO on specific interest rate subsidies paid to different recipients since their inception,115 27 percent of the finance subsidies have been paid to those in special groups, which are expected to be in lower income deciles; 18 percent goes to supported groups and 15 percent to rural households. However, developers get 12 percent and 28 percent goes to government employees. Table 3-9. Distribution of Finance Subsidies by Groups of Recipients Group of recipients In IRR Percent of total Government employees 46,672,103 28 Special groups 44,889,835 27 Supported 29,514,692 18 Rural 24,380,443 15 Developers 19,019,952 12 Total 164,477,025 100 Note: Does not include interest rate subsidies to teachers that are accounted for and managed by the Ministry of Education. Source: NHLO, unpublished information. 183. Interest rate subsidies help to lower the borrower's income requirements and make loans more affordable. At current expected market interest rates of 25 percent, only those in the eighth decile of expenditure distribution would be able to borrow even IRR30 million (US$3,750). Lowering interest rates to an average of 17 percent by imposing caps lowers the income requirement to that of the sixth decile. But those in the lower income deciles would be able to borrow IRR30 million (the cost of housing under the Ghadir Project) only at interest rates below 5 percent--and then only if they could afford to use 115Annual data on specific interest rate subsidies are not available. Due to lack of information, it is not possible to assess distribution of subsidies provided via interest rate caps. 74 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 30 percent of their income to repay the loan. At the same time, borrowers are required to make interest payments for which the government reimburses them in a year's time. Hence, households have to be able to make full payments for at least the first year. Hence, interest rate subsidies go mostly to households in the higher income deciles. Considering prices for newly constructed housing--outside the Ghadir Project and IKRC housing--it is clear that only households in top income deciles are able to afford housing. This is not only because of insufficient borrowing capacity but also because of the onerous down-payment requirements, which sometimes is as high as 80 percent of the housing price. In addition, interest rates subsidies create long-term contingent liabilities for the government, which are hard to control and unsustainable over the long run. They also create larger distortions in both the financial sector and housing market. 184. Subsidized public housing. Insufficient information about individuals living in public housing makes it nearly impossible to assess how well such subsidies are targeted. However, it is not expected that public servants and public employees would be households in the lowest deciles of income distribution. 185. Tax subsidies. Even though this paper does not attempt to assess Iran's tax subsidies, it is nevertheless apparent that they tend to be regressive and inefficient-- either as (a) income tax deductions on a borrower's mortgage payments, or (b) as tax exemptions extended to developers of, and investors in, low-income housing. The former does not affect the initial affordability of housing (apparently one of Iran's key problems); those in higher income deciles benefit because of a progressive tax rate. The latter subsidies tend to be inefficient because only a portion of them reaches their intended beneficiaries; the developer and investor consume the rest. 4. Subsidies: Efficiencies and Distortions 186. While it is important to account for subsidies, it is equally important to track the distortions and inefficiencies that subsidies introduce into the system. These have by far the broader implications for the housing sector and the economy as a whole. Distortions become particularly worrisome in an environment of increasing urbanization, with its potential for rapid increases in demand for housing. The following section explains the impact of subsidies on the housing sector in Iran in a broader context. 187. The different decisions households have to make when obtaining a house--ranging from type and location to financing--are affected by subsidies and how they are provided. Obtaining housing involves different elements such as the cost of the unit itself, which includes land, land development costs, and construction; the cost of different financing options--saving, borrowing, subsidies; and the cost of selecting among locations, types of housing, and developers. The types of subsidies create distortions in all of these areas, including inefficient use of resources (land and housing), and efficiency losses on interest-rate caps and in-kind subsidies, each of which is discussed below. 75 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 4.1. Inefficient Use of Resources 188. Use of resources is largely determined by the capital and operating costs. The capital costs, or unit costs, comprise the cost of land and land development and input cost such as materials and labor. By way of contrast, utilities are a major component of housing operating costs. To the extent subsidies affect any of these parameters, they affect resource use. 189. Land. Large swaths of public-sector land tend to be in high-price areas. Allocated mainly by administrative fiat, the land also tends to be sold to meet budget needs rather than in response to market forces; as a result, these transactions take place at below- market prices (see discussion in Section 2). At least two unintended consequences proceed from this practice. First, the resource is not used efficiently either for land-use purposes (e.g., low-income vs. high-income housing, office vs. residential vs. manufacturing buildings, etc.) or for building type (e.g., low vs. high rise).116 Second, since land prices can vary by a factor of 100 in a given city, the seemingly small subsidy (in the form of foregone revenue) may have an enormous impact when land is used in sub-optimal ways to locate the wrong kind of building or housing. 190. As discussed throughout this chapter, a few plots of public land in high-price areas have been allocated for construction of low-income housing. Most of these plots are developed for high-income groups to generate revenue to build low-income residences elsewhere. Since the market value of such housing would be much higher than the price set for allocation, it creates speculative activity, as mentioned earlier and also strongly suggested by private developers and real estate agencies. At the same time, Iran must be careful not to create extreme social segregation--for example, locating low-income housing in remote suburbs that may come with rather high economic and social costs. 191. Additional distortions were introduced through the pricing of construction permits and utility connections--practices that have been recently changed. Previously, fees per unit were much higher for multi-apartment high rise buildings than for buildings with fewer units, which discouraged efficient use of high-priced land. 192. Construction costs. Construction materials and subsidies provided by below- market energy prices are another important component of unit cost; it generally translates into a 5 to 6 percent subsidy to a housing price. This subsidy tends to contribute to less- efficient housing design, which in turn creates inelastic and high-cost construction materials. Moreover, highly subsidized utilities encourage investment in less energy- efficient housing. In addition, utilities appear to be priced seasonally. For example, electricity tariffs are lowered in the southern provinces during the summer when consumption rises because of air conditioning. As demonstrated most vividly in the 116One of the most extreme cases is post-Soviet reforming economies and, particularly, former Soviet republics, where planned economies and public ownership of land created land use patterns quite the opposite of those in market economies--which is to say, land at the city center was used less intensively than it was on the urban peripheries (for discussion see Alain Bertaud and Bertrand Renaud, Cities without Land Markets: Location and Land Use in the Socialist City, Washington DC: Policy Research Working Paper, World Bank, 1995). 76 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies Soviet economies, which before 1990 had highly subsidized utility costs, lack of incentives for the efficient use of energy creates housing that is very energy inefficient. 4.2. Inefficiencies: Interest Rate Subsidies and Limited Loan Amounts 193. Although the total subsidies on (implicit and explicit) interest rates, relative to loan amount, may be as high as 40 to 80 percent, not all of them go to households. For instance, some subsidies may be capitalized into the house value, which increases the price caused by the subsidies themselves.117 In addition, under the savings scheme, no interest is paid on the deposit. In an optimistic scenario in which an average-income urban household would be saving at a rate of 20 percent,118 the required period of savings for purchasing a unit priced at IRR56 million (US$7,000)119 would be around three to four years. In such cases, income lost by the household during the savings period may amount to as much as 50 percent of the amount of the subsidy. 194. Major inefficiencies are also created by the regulatory interest rate caps that affect households' savings and borrowing decisions and the form in which their assets are held. The caps may account for up to 50 percent reduction in interest rates on housing loans,120 shifting the costs to the savers--that is, interest rates on deposits are below market rate and, until recently, were also below the rate of inflation. In such situations, the effective tax on deposits to finance such subsidies exceeds 100 percent (in the latter case); because it not only provides zero real return, but, because of inflation, it also consumes part of the principal. This type of distortion discourages household savings and is one of the least efficient ways to provide assistance. As a result, people tend to shift to inflation-proof assets, such as housing, and away from the financial sector. Interviews with housing experts in Iran often noted that housing is one of Iran's very important assets for household investment. If the rate of inflation stays below the deposit rate, this process might be somewhat reversed. 195. Regulatory limits on the amount of housing loans introduce another distributional distortion. In Tehran and other larger cities, loans have an estimated loan-to-value ratio of around 20 percent; in other areas it may be as high as 80 percent. This distribution suggests that available financing is inversely related to regional productivity; the subsidy is not responding to locations where asset productivity would be greatest. 196. The resulting distortions may add to the indirect costs of the transfer. 4.3. Inefficiencies: In-kind Subsidies 197. "In kind" housing subsidies in Iran are quite common. They introduce large inefficiencies because the value of the asset is different for the recipient and for the provider. Many studies suggest that in-kind subsidies are less efficient than cash; the 117For discussion see Berger, T., P. Englund, P. H. Hendershott, and B. Turner, "The Capitalization of Interest Subsidies: Evidence from Sweden" Journal of Money, Credit, and Banking, Volume 32, Number 2: 199-218, May 2000 118Assuming that household income is increasing at a rate of inflation. 119Indicated as a rather typical price for a newly built house for medium-income household outside of Tehran. 120From 30 to 15 percent. 77 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies closer the design of subsidies is to cash or cash equivalent, the more efficient the subsidy (Aaron and von Furstenberg, 1971; Bradford and Shaviro, 1999; Friedman and Weinberg 1982). Because the value of the asset to the recipient is usually lower than its cost to the subsidy provider; this disparity creates further speculation (see Chapter 1), including resale of housing, cashing in the subsidy, and moving to cheaper housing, as Iranian developers and real estate agents explained in their interviews. 121 The extent of the inefficiencies is closely related to the size of the subsidy relatively to the total cost of the asset and elasticity of housing substitution for other goods, which may be from 8 percent at 20 percent subsidies to 60 percent at 80 percent subsidies. In the case of Special Groups housing subsidies (house price and land subsidies) may easily account for at least 45 to 50 percent of the value. At this level of subsidy, the corresponding efficiency loss at elasticity of substitution of 1 would be 25 percent as estimated by Aaron and von Furstenberg. 198. As a result of all the above distortions the "shadow price" of all the different subsidies can easily approach 60 percent of the subsidy. 5. Conclusions 199. Analysis of the available information shows that Iran's housing quality has improved over the past decade. In the past few years, moreover, the government has met annual housing production targets by increasing allocations of budget and non-budget (land, etc.) resources to the sector and increasing reliance on the private sector in construction. The demographic stresses created by the Iran-Iraq war and the baby boom, has also stressed Iran's housing stock (198 units per 1,000 residents), which is low by international standards. In addition, housing in Iran is further stressed by a serious mismatch between supply and demand--segmented markets by regions and incomes are not served well. These issues will become particularly important in few years' time when the rate of new household formation is expected to increase rapidly. 200. Subsidies are fragmented and nontransparent. The government is clearly concerned about its housing issues and is aware of the impending leap in demand for housing by young families. Toward these ends, the government has set up a number of different channels of assistance for the many social groups requiring help (and some that do not). Although well-intentioned, these initiatives are fragmented. Housing assistance is provided by different institutions to different beneficiaries at different stages of the process--to developers, financiers, and buyers. There are more than 15 different housing assistance programs targeting a number of social groups and developers. Several programs target the same social group, although they are administered by different organizations. Iran, in short, has no clear and comprehensive housing subsidy system. 121In accordance with a survey carried out by one developer in a building built by it in Mashad 10 percent of households had resold their units within the first year. Real estate agencies indicated that in Tehran this ratio would exceed 50 percent. 78 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 201. The estimated housing subsidies are rather large--as high as 2 to 4 percent of GDP, which in 2000­01 nearly reached the total annual housing investment of 4.6 percent of GDP. When utility subsidies of another 3 percent are added, total housing-related subsidies become excessive and by far exceed the annual housing investment. Since these subsidies tend to be nontransparent and not accounted for, they do not appear on the government's budget. In addition, subsidies (such as those on interest rates) create ever- increasing contingent liabilities for the government. 202. There is a widespread lack of knowledge in Iran about subsidies and their effects. Information about housing subsidies seems to be both limited and fragmented; in short, the government would benefit from more thorough analyses of its programs and policies on low-income housing. 203. Regressive and inefficiently delivered, housing subsidies in Iran are also, for the most part, badly targeted. Subsidies are often inaccessible to the households targeted by the government. Those in the lower deciles of income distribution in particular rarely have access to subsidies set aside for them. Having said that, we should acknowledge that programs administered through charitable organizations like the Imam Khomeini Relief Committee seem to be reaching the very poor. Still, at less than 1 percent of total housing-related subsidies, such programs have a negligible overall impact. 204. Many of the subsidies (energy and universal interest rate ceilings) are very general and, therefore, regressive. In addition, many are provided "in kind" or relate to the housing unit rather than the household. This leads to greater inefficiencies and speculation as suppliers, and not the recipients, seek to capture the subsidy benefits. 205. Further inefficiencies are introduced by subsidies oriented to the supply side. Supply-oriented subsidies run the risk of developing housing concentrations of low- income groups; ghetto creation has occurred in a number of countries to no good effect. 206. Subsidies have much broader effects and distortions on the entire housing sector. The form of subsidies and the way they are provided have much broader effect on the housing sector and hinder its development and ability to meet housing demand effectively. The distortions and controls involved in providing these subsidies are significant and impose large, indirect, and unmeasured costs on an urbanizing, high- inflation economy like Iran. 207. The population groups the government has decided to assist are not receiving the full benefits of such assistance. For many, such assistance is inaccessible. Iran has a great opportunity to reach those most in need of housing simply by improving the manner in which this assistance is provided. It can improve assistance, in other words, without increasing government expenditures. This will require efforts to make its subsidies more efficient; short- and long-term changes are discussed below. 79 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies 6. Recommendations 208. The housing sector in any country is characterized by internal contradictions. For example, housing is one of the most indispensable and expensive goods for any household, requiring short- and long-term views. A short-term positive effect might have negative long-term consequences. Governments need to balance economic efficiency and social equity, public and private action, collective and individual choices, tenant protection and property rights, and so on. These are difficult decisions. And neither an ideological approach nor an imported scheme is likely to provide the needed fixes. The development of any scheme requires the careful consideration of all the aspects of the sector. 209. Several important rules apply to subsidies as a tool of housing policy. · well-targeted, direct subsidies minimize inefficiency; · transparent and manageable subsidies reduce uncertainties and long-term contingent liabilities for the government; · explicit and measurable subsidies are easier to control and evaluate. 210. Demand-side subsidies are better than supply-side subsidies. Within demand- oriented subsidies, up-front subsidies are favored, despite the monitoring and control systems required to guarantee the subsidy is used as intended. 211. The government should withdraw from direct involvement in providing housing. The government should improve its awareness of subsidies--their extent, their efficiency, their targeting effectiveness--by: · collecting more specific information on recipient income and other important characteristics; · recognizing and measuring subsidies to improve government accountability; and · reviewing and evaluating extant programs and those being developed or prepared, and simplifying and consolidating redundant programs. 212. The government should target subsidies to the intended beneficiaries and those in lowest deciles of income distribution by: · reviewing, adjusting, and eliminating any subsidy programs as is seen necessary; · improving its scoring mechanism for determining housing need to account for household income; and · including some limits on the size and cost of the housing unit in the subsidy- eligibility requirements. 213. Inefficient subsidies should be eliminated gradually. Some candidates are: 80 Iran--Strategies for the Housing Sector Chapter 3: Housing Subsidies · land subsidies. Government policy should allow households (via demand-side subsidies) and developers (if a supply-side subsidy is used) to make their own choices on location. Public land should be sold at market prices and the resources used for the necessary demand-side subsidies, if these are used. During the transition, if the land is allocated as the government's equity investment in housing construction under participation arrangement, the government's "share" of the constructed housing could be constructed in accordance with appropriate requirements (limited size of the unit and standards) and either sold or rented to low-income households. This would also avoid ghettoization since "social" units would join the larger housing pool of private units; · interest rate subsidies; and · tax subsidies provided specifically to public servants (irrespective of income level); replace them with more efficient and direct up-front subsidies (see below). 214. Regarding the transition period, during which some subsidies are replaced with more progressive and transparent subsidies, the government of Iran could prepare a detailed work plan, which would identify: · currently supported groups that no longer require government assistance, and set a date for their subsidies to cease; · groups that continue to require assistance and decide when and how the current subsidies should be reorganized; · demand-side subsidies, such as up-front subsidies, that could improve initial housing affordability and reduce the amount of required borrowing; · better incentives for developers to supply low-income housing, which would meet demand and be linked to demand-side subsidies directed to low-income household; and · energy subsidies that might be eliminated. A comprehensive reform of the national energy sector could realize savings that could be targeted at demand-side housing subsidies. 81 4 Housing Finance 1. Iran's Housing Finance System: Organization and Performance 215. For both social and economic reasons, the Third Five-Year Development Plan (1379­1384) made the housing sector a high-priority issue. Small wonder, for the number of new urban households continues to break records, and the official national unemployment rate has passed 17 percent.122 These housing priorities are also reflected in the system of credit allocation administered through the public banks system. Yet Iran's housing finance system is small compared to the size the national economy and will have difficulty meeting the ambitious objectives Iran has for affordable housing, as set out in the current Five-Year Plan. 216. This report focuses on three main aspects: the size and performance of the housing finance systems, the present supply of housing finance services, and reform issues and options. 1.1. Iran's Small Housing Finance System Relative to the Economy 217. The housing finance system in Iran serves a small portion of the overall economy, particularly when compared with other economies. The ratio of construction and housing loans (for residential construction and purchase finance) that are still outstanding at the end of each year compared with GDP is currently fluctuating around 7 percent. But in recent years about 59 percent of these are short-term construction loans. The stock of long-term housing loans, strategically the most important, has been fluctuating between 2.5 percent and 3.3 percent of GDP over the past five years. ( See Table 4.1) 218. International research over the past decade has clearly established that the financial sector is not a passive component of development. Rather, the quality of the financial system contributes directly to economic growth. This leading role of financial services in promoting growth applies to individual sectors like housing as well. Social programs funded by government budgets and other sources outside the financial system are not substitutes but only complements--provided they are properly designed and do not undercut financial development.123 122Persian years start on March 21. The current year 1381 straddles international years 2002 and 2003. U.S. dollar figures are based on the CD exchange rate of IRR7,916.6 per dollar for the Persian period, 1379-Q4 (2001-Q1). 123See World Bank, Finance for Growth: A Policy Research Report (Oxford University Press, 2001), and Asli Demigüç-Kunt and Ross Levine, Financial Structure and Economic Growth, Chapter 3 (Cambridge: MIT Press, 2001). Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Table 4-1. Iran: Depth of the Housing Finance System Persian International GDP at market Outstanding Loans to Ratio of Construction Ratio of Housing Year Year prices Construction and and Housing Credits to Loans to GDP (RI b) Housing (RI b) GDP (Percent) (Percent) 1375 1996-97 239,185.0 14,065.8 5.9 2.4 1376 1997-98 281,074.0 17,331.7 6.2 2.5 1377 1998-99 317,085.0 23,534.6 7.4 3.3 1378 1999-00 426,367.0 32,819.4 7.7 3.2 1379 2000-01 582,050.0 39,914.7 6.9 2.8 Sources: MPO and Iran Central Bank, World Bank estimates 219. Housing finance depth ratios of 2.5 percent to 3 percent such as those of Iran are found mostly in the transition economies of Central and Eastern Europe that have been rebuilding their financial systems since the early 1990s, after years of central planning. It is also noteworthy that financial systems are considerably more developed in East and Southeast Asian countries than in the Middle East, which correlates with the economic performance of each region. See Table 4-2 for a comparison of different housing finance systems; a tabular comparison with other oil-dependent countries would be particularly interesting, but such data are not available.124 Table 4-2. Iran's Housing Finance System: Some Comparisons Country Outstanding Housing Year Per Capita Urban, 1997 GDP Deflator Loans to GDP (%) GNP (US$) (%) 1990-98 (%) Pakistan < 1 2000 434 35 11.2 IRAN 2.8 2000 1,770 60 32.5 Morocco 4.0 1997 1,250 53 3.8 Tunisia 5.9 2000 1,535 63 4.8 Thailand 16.4 1999 1,505 28 4.8 Malaysia 21.8 2000 2,630 55 4.5 European Union 36.0 1998 17,720 74 1.8 Canada 43.0 2000 17,280 77 1.7 USA 53.0 2000 19,415 77 2.2 Source: Housing Finance Indicators (HFI) database, World Bank Indicators. 1.2. Why Does Iran Have a Small Housing Finance System? 220. International evidence shows that four core factors affect the performance of a housing system in any country. These four factors have had a cumulative negative impact on the development of the housing finance system in Iran and on the performance of its 124It would bee worth comparing in some detail financial development in Iran and in Thailand. At the start of the new millennium, the two countries have comparable population sizes and per capita GNP, but they have followed very different economic and financial paths. In 1999, the per capita GNP of Iran was $1,588, while that of Thailand was $1,982 (IMF-IFS data). However, in 1980, Iran's per capita GNP was $2,369 when that of Thailand was only $687. Using oil boom figures for 1976 makes the contrast in growth dynamics is even greater, with Iran's per capita GNP at $2,471 and Thailand's at $394. As Table 4.2 shows: the present housing finance system of Thailand is about six times deeper than that of Iran. 83 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector housing sector for much of the last two decades. However, a gradual policy turnaround has started over the last five years and the current FYP period offers opportunities for significant improvements. The four key factors that shape the outlook for housing are: (a) first and foremost, inflation and macroeconomic (in)stability that can create an environment hostile to financial development, and most particularly long-term housing finance; (b) the legal and institutional environment that conditions the development of the entire financial system; (c) policy and structural shifts that can improve risk-adjusted returns to investment in the sector; (d) demographic trends and economic housing demand that can offer the prospect for rapid growth of a housing finance system. 221. Macroeconomic volatility and inflation have been major constraints. Housing prices are always a multiple of the annual income of households that want to buy housing. Therefore, access to long-term finance is required for most families to purchase housing. Access to home ownership has two major and very distinct dimensions: (a) the price of the unit compared with purchasing power, and (b) the cost of finance. During the 1990s, Iran has faced serious problems on both fronts. The ratio of the housing price-to- annual household income faced by most income groups has reached values as high as 10 in the mid-1990s in Tehran and have declined only to around 8 in 2001. In sound and balanced housing markets, such ratios have a value of 4 and usually less; and it is only in small Iranian cities that such ratios can be observed today (see Figure 3 of the synthesis report). 222. The macroeconomic environment during the period 1379 (1990­91) to 1389 (2000­ 01) has also been hostile to the development of the housing finance system: inflation has been very high and volatile while deposit rates in banks have been regulated at levels well below inflation, thus insuring a negative return to small savers and a chronic shortage of deposits. As a result, housing finance services became increasingly scarce. They also contain a large embedded subsidy indexed to inflation given the gap between artificially low lending rates and actual inflation, conditions that always create a strong, regressive dynamic across income groups. The scarcity of finance is correlated with the large gap between regulated bank rates and free market curb rates. Financial economists call such a policy environment "financial repression" because rates in the banking system are repressed below the true cost of capital in the economy. 84 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Figure 4-1. Iran: Inflation, Curb Market Rates, Regulated Lending Rates 1365- 1379 (1986-2001) 70.0% 60.0% 50.0% S-T Deposits 40.0% Credit Rates 30.0% CPI Inflation Curb Market Rate 20.0% 10.0% 0.0% 1365 1366 1367 1368 1369 1370 1371 1372 1373 1374 1375 1376 1377 1378 1379 Sources: MPO, Central Bank, Banking Training Institute. 223. As seen in Figure 4-1, macroeconomic conditions in Iran reached their worst stage in 1374 (1995­96) when CPI inflation reached 50 percent per annum. Curb market rates in the unregulated financial markets reached well above 60 percent for short-term finance. In such an environment, market-based, long-term housing finance was unaffordable to potential homebuyers and the housing finance system could not expand in real terms. Since then, better macroeconomic policies pursued across a wide front are improving the environment. Nominal lending rates have finally become higher than inflation for the first time in 1379 (2000­01). Positive deposit rates are already attracting more savings into the banking system.125 224. The level of inflation risk remains significant going forward,126 and the design of suitable housing finance instruments is one of the immediate, short-term needs of the housing finance system. The weighted average return charged on new credits granted by the housing bank (Bank Maskan) in the first half of year 2001 was only 15.4 percent per year.127 This return was below the level of inflation observed over the past 15 years. It is only during the year 1379 (2000­01) that this weighted credit rate rose above the CPI inflation rate of 12.4 percent that year. In most years, Bank Maskan has been unable simultaneously to offer positive real returns to its depositors after inflation; cover its operating expenses; cover forward-looking credit, interest and inflation risks; and build up its capital. (Refer to Section 2.2, where Bank Maskan operations are examined). 125Iran is not a low-saving country. The aggregate savings rate fluctuates at around 30 percent of GDP. However, specific data on household savings performance was not available for this report. 126A short-term refueling of inflation can be one of the short-term costs of the very important and much needed exchange rate reform of March 2002. 127The credits cover in this weighted average return exclude "civil partnership" financing facilities whose returns are calculated differently. 85 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Presently, the way Bank Maskan is able to generate new loans is by taking advantage of its special privileges and by assuming liquidity risks of unmeasured magnitude on its new loan-linked deposit products. (See section 2.2) Under current inflation, about 60 percent of Bank Maskan credits go to short-term construction finance, and only 40 percent goes to critically important long-term purchase finance. 225. Institutional framework of directed credit. The environment of directed credit is a second explanatory factor behind the low performance of the housing finance system. Four core laws are shaping the dynamics of the system. Their main features are as follows: · On 3.17. 1358 (June 7, 1979), the Bank Nationalization Act nationalized the entire banking system.128 The present housing bank, Bank Maskan, results from the nationalization of the 40-year old Mortgage Bank of Iran and of its merger with the construction bank, whose shareholders comprised a number of private banks, and 16 savings and loan associations. After this nationalization, Bank Maskan became the only specialized bank for the housing sector. · The same year 1358, the Bank Management Act specified the system of directed credit under which the newly nationalized banks would become financing instruments of the national plans under the control of the central bank (Bank Markazi) and the government. In particular, the law removed from the housing bank commercial autonomy in defining types of lending products, loan ceilings, and rates of return on deposits as well as on loans. As a result, major elements of financial risk management are currently removed from the housing bank`s direct management responsibility. Instead, they are embedded in laws and decrees that are not always easy to modify in a timely fashion.129 The explicit guarantee of the government stands behind Bank Maskan operations, which creates an environment of "moral hazard" for decision- making in at least three ways: fragmented and overlapping decision-making where those who give orders do not necessarily bear the risks of their decisions, indirect liabilities for the government that remained unaccounted for, and a lack of transparency.130 Note also that until 1995 (10-7-1373) commercial banks were prohibited from lending to housing. · On 6.8.1363 (August 30, 1983), Iran enacted an epochal comprehensive legislation in the form of the Law of Usury-Free Banking. This law mandates Islamic finance principles not for selected banks but to the entire financial system including banks and other financial institution making Iran one of only three such countries in the 128Before the nationalization of 1979 36 banks operated in Iran, 26 were commercial banks, 7 of them were specialized banks, and the other 3 were regional development banks. These banks were banks with 100 percent Iranian ownership, others had mixed Iranian and foreign shareholders, a number of them were public banks. New forms of mutual Islamic housing banks offering savings and housing finance services to local urban markets have not replaced the system of 16 mutual savings and loan associations. What exists now is only a network of more than 5,500 active construction cooperatives that are not credit cooperatives but building organizations aiming at preferential treatment for access to land and other inputs. 129In the absence of the text of the Bank Management Law, the Bank did not clarify the specific channels through which the Housing Bank receives policy directions from the Ministry of Housing and Urban Development. 130See Chapter 3 "Government Failure in Finance," in Finance for Growth: Policy Choices in a Volatile World. A World Bank Research Report (Oxford University Press, 2001). 86 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector world.131 To finance housing, four types of Islamic contracts were selected and acceptable financing services were redefined as reviewed below. In implementing the law, the central bank sets minimum and maximum rates of profits of the new financing products of the housing bank and other banks. In spite of the volatile macroeconomic environment, these rates have changed very infrequently over the years, as seen in Figure 4-1. · The fourth core law structuring the Iranian banking system is the pre-revolutionary Monetary and Banking Act of 1972, subsequently amended in 1979 and again in later years. This law defines the framework of monetary policy for the new Islamic financial system as implemented by the central bank. As a deposit-taking institution, Bank Maskan is subject to regulation and supervision by the central bank for monetary policy. The Money and Credit Council decides on credit allocation across sectors and approves deposits and credit rates, as well as new banking products. 226. In addition to these four core laws, other legal and regulatory factors come into play for the development of housing finance. The Monetary Council's financial laws and regulations affect the overall quality of the financial infrastructure and apply to all lenders. Some directly affect long-term financial risks in housing finance. In addition, the quality of urban, laws, regulations, and practices affecting housing and construction has a decisive impact on the credit risks faced by lenders. These urban laws and institutions affect areas such as: land titling and property registration systems, as well as real estate market monitoring and standards of valuation. Urban-planning regulations and the structure of land ownership in a specific housing market can raise the housing-price income ratio to high levels, as is the case in Tehran, which makes housing finance even more difficult and also more risky. This chapter focuses on financial problem areas identified by the Bank team. The urban regulatory environment is discussed in other section of the report. 227. Overall financial sector performance and recent policy shifts. If the housing finance system is small, what has been the overall performance of the Iran financial system in the decade of the 1990s? Table 4-3 presents comparative performance indicators for Iran and 17 other national financial systems. 132 This data extend to the entire financial system the results reported for housing finance. In spite of its significant per capita GDP level, Iran has one of the smallest and least performing financial countries among the 18 countries covered in Table 4-3. 133 Iranian ratios are considerably lower than the world average of 70 countries. See Table 4-3, where countries are ranked according the ratio of liquid liabilities in the financial system to GDP, which is the ratio most representative of the total size of a financial system (see column 2). The size of the Iranian banking system proper is one of the two smallest with Turkey (see column 3). 131The two other countries where only Islamic forms of finance are permitted are Sudan and Pakistan. All other countries have financial laws that allow the coexistence of conventional finance and Islamic finance. 132See Asli Demigüç-Kunt and Ross Levine, Financial Structure and Economic Growth, Chapter 3 (Cambridge: MIT Press 2001). This project supported by the World Bank offers the first worldwide comparative study in 30 years. 133The project did not access data on the financial systems of oil-rich countries among the 70 countries covered, except Iran and Indonesia. Note that Iran's per capita GNP was higher than what is calculated now for several reasons, including low growth, an overvalued official exchange rate, and a smaller population. 87 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Severely affected by inflation and macroeconomic instability, both banking systems are considerable smaller than in the other 16 countries. The level of financing provided by the banks to the private sector in Iran is also low, reflecting the fact that state-owned banks tend to give preferential access to state-owned enterprises (see column 4). Finally, the ratio of central bank asset to GDP of 6 percent reflects in part the active development- banking role that the central bank in Iran plays in the economy (see column 5). Table 4-3. The Performance of Financial Systems in the 1990s: A Comparison Country GDP per Capita, Liquid Bank Claims of Deposit Central Bank 1990­95 (US$) liabilities/GDP Assets/GDP Banks on Private Assets/(%GDP) (%) Sector/(% GDP) Turkey $2,259 22 19 13 6 Pakistan $435 41 36 23 14 Indonesia $610 42 49 46 2 Iran $2,395 44 22 20 6 India $385 44 34 24 13 Philippines $734 45 37 28 9 Tunisia $1,534 47 55 51 1 United States $19,413 60 73 64 5 France $15,233 64 102 89 1 Korea $3,910 65 55 53 1 Germany $16,573 66 121 94 1 Israel $9,260 69 92 60 6 Thailand $1,502 77 82 78 2 Egypt $1,042 81 63 26 34 Great Britain $11,795 96 116 114 3 Malaysia $2,629 97 82 75 1 Jordan $1,289 111 71 62 21 Japan $15,705 191 131 117 5 MEAN (70 countries) $6,546 59% 58% 48% 8% Source: Asli Demigüç-Kunt and Ross Levine, Financial Structure and Economic Growth, 2001. Table 3.1. 228. Acknowledging these performance problems, the framework of the current Five- Year Plan (FYP) (2000-2004) commits the government to a series of fiscal and structural reforms. These economic policy measures remain vulnerable to the complexities of policymaking processes. One significant achievement of the first term of the present administration has been to bring inflation down and to improve the stability of the economy. Ongoing work is now focusing on privatization in the banking system and fiscal reforms. A priority concern of economic policies is to bring up living standards that have been deteriorating. Hence the current interest in the housing sector where proper housing finance policies can raise domestic savings and stabilize aggregate domestic demand. 229. The establishment of private banks has already been approved. On August 25, 2001, Bank Markazi (central bank) issued the first operating license to a privately owned bank (out of 30 applicants). According to plans, private banks will be able to set their new 88 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector rates. It is also expected that the banking reforms will lead to the restructuring of the 10 state-owned banks (six commercial banks and four specialized banks). Initial steps will give more discretion on loan decisions and somewhat greater flexibility in employment policies. In that context, it must be noted that Iran wants to adhere to the Core Principles on Banking of the Basel Committee. Financing information technology which is the heart of banking today will be a challenge because the banks do not have the capital to move fast in this critical area. 230. Other actions already taken by Bank Markazi and the Money and Credit Council to prepare the liberalization of the financial system include · In 1999, Article 3 of the charter of Bank Maskan was modified to permit the same activities as those of commercial banks. · Since 1379 (2000­01) banks are allowed to allocate up to 20 percent of their new lending freely outside sector credit guidelines. The balance of 80 percent remains subject to sector allocation rules. The current credit allocation rules for non­public sector credit are as follows: Agriculture 25.0% Manufacturing and mining 33.5 Housing 20.0 Construction 9.0 Exports 8.0 Domestic trade and services 4.5 TOTAL 100.0% Source: Central Bank of Iran · New private bank and finance companies can offer credits at high rates (some currently reach up to 30 percent per year). Given the lack of access to long-term funding, however, such credits are available for three years of less and carry low loan-to-value ratios, which limit private lenders to a small percentage of the very high-income population. · The Central Bank will deregulate short-term credit pricing covering new construction, completion, and improvement loans as well as deposit rates for commercial banks. · Specialized housing finance companies or banks will be permitted to raise long-term resources through interbank credit. · The Ministry of Finance and the Economy is currently revising regulations to permit the private sector to issue partnership papers. · As discussed further in Section 3.3, legal work is in progress to develop a long-term capital market for housing finance securities. But a short-term market is not yet in place. 231. Demographic trends and structure of housing demand. The Iranian government faces considerable public pressures to improve housing conditions through the Third and Fourth Five-Year Plans. At first sight, this presents a paradox because macroeconomic 89 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector indicators of housing sector performance have improved over the past five years. But these apparent improvements in aggregate trends are misleading. Moreover, they throw little light on why social pressures are actually mounting, and on why expanding the supply of "social housing" is a policy priority of the current Third FYP.134 The pressures arising from predictable demographic trends are certainly high. But actual market performance will be dominated by effective economic demand, and not by demographic needs and the associated political expectations. In the absence of a soundly based housing finance system, the structure of housing demand today --and therefore access to housing--varies sharply across income deciles, and across cities. The structure of housing demand and the supply response are central elements to the design of successful housing and housing finance policies. 232. What do we know about the structure of economic housing demand in Iran for the next two plans? How is it likely to affect the demand for housing finance services? 233. Demography. The population growth rate has declined very significantly during the 1990s from very high levels in the 1980s. But at 1.67 percent p.a. in 1379 (2000-01), Iran's population growth still remains above the average growth rate of 1.5 percent p.a. for middle-income countries during the period from 1990 to 1998.135 There is great concern about the demographic bulge created by young people who will enter housing markets during the next decade. Social pressures arise from the accelerating rate of urban household formation. Table 4-4: Iran's Urban Demography, 1970-2010 Year Total Population Urban Population Urban Household New HH per year 1349 (1970-71) 28,727,000 11,795,000 2,373,000 129,000 1359 (1980-81) 39,646,000 19,468,000 3,714,000 196,000 1369 (1990-91) 53,401,000 31,849,000 6,124,000 304,000 1379 (2000-01) 63,800,000 *40,768,200 *9,060,000 *375,000 1389 (2010-11) *75,300,000 *51,200,000 *12,800,000 *385,000 Source: MPO statistics, UN Population Division, and World Bank estimates 234. The rate of new urban household formation is currently greater than the number of new urban units produced across cities. This implies an increasing rate of doubling up of families in parts of the existing housing stock of large cities like Tehran given also stock replacement needs and city-to-city migration. 235. Education. Education is a very positive factor for Iran, where the literacy rate is considerably higher among young people. For the age groups 6 to 29, the literacy rate was 96.3 percent in 1378 (1999-00). This population will be able to use modern financial services effectively; the overall level of financial literacy should increase significantly. 134Since the Budget Law of 1994­95 (1373, Article 52), Iranian housing policies divide markets into three segments: "free," "protected'" (sometimes called "supported" housing), and "social" housing. "Protected housing" are units under 75 m2 of floor space in Tehran, Esfahan, Tabriz, Shiraz, and Mashad, and 100 m2 in other cities. "Social housing" includes units under 50 m. 135World Development Indicators, Washington DC: The World Bank, 2000. 90 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 236. Household purchasing power. Gains in real household purchasing power during the 1990s have been minimal. In terms of per capita income, Iran is part of the group of lower middle-income countries as defined by the World Bank. As shown in Figure 4-2, per capita GDP has risen only very slowly and remains 25 percent below what it was in 1976 at the peak of the oil boom. In fact real GDP per capita appears to track rather closely the pattern of crude oil production Iran, reflecting the continuing dominance of that sector in the economy. According to the Household Survey, the average urban household size today is 4.7 persons; richer families have larger households. This is unusual and contrary to expectations. Figure 4-2. Iran: GDP Per Capita in 1982 Rials, 1974-2000 450 400 350 300 1982 of 250 Rials 200 1,000150 100 50 0 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 237. Urban income distribution. The income distribution has a major impact on the actual demand for housing finance services and on home ownership. During the past 20 years, Iran has had an unequal distribution by international standards, as Table 4-5 shows. The national Gini coefficient of income distribution is currently estimated at 0.42 in year 2000 and has improved over earlier years. Rural-urban and inter-regional disparities are large, and inequalities within the rural sector are greater than in the urban sector. Iran urban income distribution is slightly less skewed with a Gini ratio of 0.40. Within the urban sector, the income distribution is better and has improved over the past decade. The ratio of urban deciles D10/D1 was 16.5 in 1371 (92/93) and improved to 14.3 in 1379 (99/00). The ratio of urban quintiles Q5/Q1: was 8.7 times in 1992 and improved down to 7.9 in 2000. (Source: Statistical Center of Iran).136 136This latest quintile ratio would rank Iran with the five U.S. states with the narrowest income gaps in 1998­2000. Those five U.S. states with the worst ratios ranged from 10.5 to 12.8. See Jon. E Hilsenrath "The Income Gap Shrank at the End of the 1990's." Wall Street Journal, April 24, 2002. 91 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Table 4-5. Income Inequality in Iran compared with Selected Countries Canada 30.8 Germany 31.4 France 34.9 United States 37.1 Egypt, Arab Republic of 32.0 Jordan 39.2 Morocco 39.2 Iran, Islamic Republic of 42.9 Turkey 44.1 Notes: Average of Gini coefficients over the period 1980­1995 Source: Deininger, K. and Squire L. (1996). "A New Data Set Measuring Income Inequality" The World Bank Economic Review, Vol. 10. No. 3. 238. Some 18 percent of the urban population is below the poverty line, which implies that the lowest quintile of the population needs multidimensional assistance programs and that this group cannot access market-based financial services directly. The urban poverty line in 1378 (1999­00) was set at IRR854,410 or approximately $110 per month. 239. It is prior wealth--mostly in the form of housing and real estate wealth --rather than income power that currently drives economic demand and permits access to home ownership in Iranian cities. This situation is inherited from the macroeconomic and financial environment of significant inflation, financial repression, and very limited access to housing finance that prevailed for more than a decade. The fact that the private supply of new housing is cash- and wealth-driven is central to the design of new housing and housing finance policies 240. The triple combination of a skewed income distribution, high price-to-income ratios, and a small housing finance system with housing loans capped at IRR50 million is cutting off access to home ownership for a majority share of the population in large cities, in particular young households. In Tehran a housing unit with 75 m2 of floor space was estimated to cost IRR168 million in 2000­01 (US$21,300). The loan maximum yields a low loan-to-value (LTV) ratio of 30 percent, which is not manageable for most families. In the other large cities of Esfahan, Mahsad, Shiraz, and Tabriz the price of a similar 75 m2 unit was estimated at IRR75.8 million. In these markets, the LTV ratio becomes a more reasonable but still difficult ratio of 66 percent because most households could not afford a 34 percent down payment without the help of their families. It is possible to suggest what fraction of the population might have access to homeownership in specific market by using national urban household expenditures as a biased proxy of actual incomes in selected cities. In Table 4-6, the gray area of lower income deciles suggests the extent of the housing problem. In Tehran in particular, about 70 percent of the population appears to be confined to the low-cost "social" housing stock of 50 m2 units. 92 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Table 4-6. Iran: Ownership Affordability, 2000-2001 (1379) Income National Average. Price to HH Price/Expenditures Decile Annual HH Expenditures Expenditures Ratio In Large (RI1,000) Ratios In Tehrana Citiesb 1 4,942 34.2 15.3 2 8,721 19.4 8.7 3 11,474 14.7 6.6 4 14,083 12.0 5.4 5 16,655 10.1 4.5 6 19,569 8.6 3.9 7 23,344 7.2 3.2 8 28,557 5.9 2.7 9 37,498 4.5 2.0 10 74,579 2.7 1.0 Notes: (a): Based on the price of a 75 m2 unit in Tehran. (b): Based on the average price of four large cities Source: Data compiled by the World Bank using various publications from the Iran Statistical Center, Tehran, 2001. 241. Rates of housing appreciation. The annual rate of housing appreciation at the national level has been extremely volatile in Iran over the last thirty years137. The appreciate rates was the highest during the oil boom prior to the Revolution in 1979. Prices were severely depressed in the early years of the Revolution for many reasons, including the confiscation of a large volume of land and other types of real estate assets across the country, and the nationalization of the housing finance system. Over the past 15 years, the national rate of housing appreciation has been 21.5 percent. Obviously, appreciation rates vary widely across cities, and across neighborhood within cities. No disaggregated data were available to the Bank team, but if international experience is any guide, one would expect appreciation rates in the upper-income areas of major cities to have been significantly higher than the national average. Underlying the great volatility of prices (see Figure 4-3) is a steadily rising trend in housing price gains since the mid- 1980s. Surprisingly, the data suggest that housing appreciation rates have often been lower that inflation. This would suggest that housing has not been a very good protection against inflation in Iran. Before reaching such a firm conclusion, the structure of the housing price index would need to be reviewed. In particular, is the housing price index reflecting supply costs or market values? What kinds of housing units does the index cover? 137Table 9 in Bureau of Housing Planning and Economics, National Land and Housing Organization, "A Study on the Efficiency of Housing Market Mechanisms in Urban Areas." Part 2. First Edition. No date. 93 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Figure 4-3. Iran: Housing Appreciation Rates 1971-1999 60 50 40 percentage 30 20 annual Housing Prices CPI Inflation 10 0 National -10 1971-72 1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 Source: Bureau of Housing Planning and Economics, National Land and Housing Organization, "A Study on the Efficiency of Housing Market Mechanisms in Urban Areas." Part 2. First Edition. No date. Table 9 242. Rapidly rising rents. The households that cannot gain access to home ownership have to rely on the rental markets or must double up with other families. Rents in the rental markets appear to be rising even more rapidly than housing prices, as shown in Table 4-7. These trends reveal important imbalances between housing demand and housing supply, especially in major cities. Security deposits are very large, representing about two years of rent or more. These required large deposits reflect high inflation, the avoidance of banks, and a likely preference for curb market arrangements by landowners given present financial market conditions. They tend to make the rental market more regressive and more dependent on prior wealth for young households. Table 4-7. Iran: Trends in Monthly Rents and Deposits in Major Cities, 1997-2003 Tehran Esfahan Shiraz Rental Deposit Ratio Rental Deposit Ratio Rental Deposit Ratio 1377 (1998-99) 5,060 130,894 26 2,372 53,816 23 2,857 68,417 24 1378 (1999-2000) 5,805 160,998 28 3,001 65,926 22 3,425 86,059 25 1379 (2000-2001) 7,595 195,078 26 3,678 81,804 22 4,113 93,483 23 1380 (2001-2002) 10,471 242,519 23 5,056 84,040 17 5,632 112,461 20 1381 (2002-2003) 13,640 323,837 24 7,002 107,495 15 7,446 129,889 17 Five-year change 170% 147% 195% 100% 161% 90% Source: Housing, Construction and Infrastructure Statistics, Tehran: Statistical Center of Iran, 2002. 94 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 1.3. Housing Dynamics: The Impact of Scarce Financial Services 243. Iran's relatively small housing finance system plays an important role in unbalancing housing output at present, but relative size is not the only cause. Several structural factors are combining to make the output of housing very cyclical and to skew the composition of new output toward large units generally out of reach of the purchasing power of a large portion of the population. As discussed, macroeconomic volatility and high inflation have interacted with the system of directed credit to generate an important degree of financial repression. This repression makes it very difficult for the housing finance system to mobilize long-term funds anywhere near an adequate scale. 244. To ration scarce funds and to maximize the number of clients reached, the housing finance authorities offer only very low financing-to-value ratios to home purchasers. The impact of these important distortions is that housing investment, especially in major markets such as Tehran, is cash- and wealth-driven. Over the past two decades, effective housing demand in Iran could not be income based. Young families with good life- income prospects are left out. Private supply responded only to the skewed income distribution, and to the even more highly skewed distribution of wealth. From a macroeconomic viewpoint, the housing sector is not contributing to the stability of aggregate demand, which is already very sensitive to fluctuating oil prices. 245. Housing and other real estate assets have been prime "assets of refuge" against permanent two-digit inflation over the past two decades. Iran is already a very urban economy with more than 60 percent of its population residing in cities. In the absence of Iran wealth surveys, international evidence points to housing as already being the single largest class of assets in the entire Iranian economy. Because the financial system is not offering adequate assets, urban households are limited to housing, consumer durables like cars--or more traditional assets such as collector carpets, gold and jewelry, and so forth, for their economic security and wealth accumulation. SME owners can also invest in their own businesses. Pension systems are not well developed. Because financial repression has been strong since 1979 and deposit rates have been kept continuously below inflation, banks were providing only a negative return to savers. The stock market is small and its access is limited at best to the top 20 percent of the population because information barriers are very significant in that market. 246. Additional factors contributing to distorting housing markets also exists on the supply side. The high share of land in the total cost of housing units strongly suggests that the supply of housing in Iran--and in major cities like Tehran and Esfahan in particular--is quite inelastic (see Chapter 2). According to the National Land and Housing Organization, the share of land in total housing cost has risen steadily over the past two decades. This land ratio has passed the 50 percent mark several times in the past five years, which is a surprisingly high ratio for a land-abundant country like Iran, suggesting an inadequate supply of new serviced urban land.138 138See Table 13, Bureau for Housing Planning and Economics, NLHO, "A Study of the Efficient of the Housing Market Mechanisms in Urban Areas," 2001. 95 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 247. The present emphasis on a rapid expansion of the small, affordable housing units is a practical short-term policy response. The structural problems of the housing sector identified above, however, will need to be addressed in a consistent and sustained manner if any lasting solution is to be achieved during the next two plans. In the absence of such structural reforms, the possible recurrence of cycles of booms and busts with their corollary social tensions could not be dismissed. The broad directions of reform are known.139 On the demand side, a liberalized housing finance system should develop the capacity to offer positive after-inflation return to savers. To improve macroeconomic stability and continue to lower inflation, the large array of subsidies should be consolidated and their volume reduced. A primary concern in restructuring these subsidies will be to leverage in the private resources of households and businesses. On the supply side, improving the responsiveness of housing supply should lower the high share of land cost in total housing costs. 140 More affordable housing prices will expand the demand for housing finance services. This report focuses on possible actions to improve the housing finance system, but before proceeding it may be useful to document some recent features of Iran's housing output. 248. Private housing market: A volatile output . Access to new housing ownership is conditional on the sale of previous housing or other real estate assets. The system is therefore highly pro-cyclical. Risks are amplified for all participants--and not only for over-leveraged developers. Output volatility appears to be substantial in Tehran, as suggested by the volatility of permit approvals in estimated floor space from year to year: 249. The volatility of output in Tehran probably affects the entire national economy because of Tehran's weight in the urban economic system. In 1379 (2000­01), Tehran represented 32.4 percent of the urban building industry, i.e., 9,487 out of IRR29,219 billion. In U.S. dollars the national building industry output amounted to $ 3.69 billion that year (new starts: 28.7 percent; semi-finished: 46.6 percent; completed: 24.7 percent). The building industry output across cities was even with: 32.4 percent for Tehran; 33.1 percent in large cities; and, 34.3 percent in other urban areas. Table 4-8. Tehran: Volatile Year-to-Year Permit Approvals Year Million of Square Meters Approved Year-on-Year Change 1376 (97/98) 7.4 -39.3% 1377 (98/99) 5.3 -28.4% 1378 (99/00) 10.1 + 89.7% Source: Bank team estimates and MHUD 139In spite of significantly different institutional and growth contexts, South Korea experienced 15 years ago a pattern of housing distortions driven by policies that bear some similarity to Iran's difficulties today. See Bertrand Renaud "Compounding Financial Repression with Rigid Urban Regulations: Lessons of the Korea Housing Market," Review of Urban and Regional Studies, Tokyo, Vol.1,No.1 (January 1989): 1­22. 140In addition to land as an asset of refuge, very high land costs could be due to one or more of three broad factors: institutional factors such as government land ownership and land ownership by nonprofit organizations that fragment urban land markets and restrict supply to only a fraction of its potential; the weak financial conditions of local governments that prevent them from providing infrastructure and expanding the supply of serviced land; and, third, rigid physical urban planning rules that are not market responsive. These factors may differ across cities. 96 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 250. Such volatile conditions affect construction material prices negatively as suppliers face rapid shifts from feast to famine and back again. International experience suggests that the quality of construction and finishing materials tends to be affected negatively as well. In Iran, the annual construction materials index shot up from 100.0 in 1376 (97­98) to 155.5 in 1379 (00­01). Quarterly variations appear to be even greater. 251. Unbalanced housing output favors very large units. As noted, housing and other forms of real estate are preferred assets of refuge against inflation for high-income groups. 141 This is confirmed by the very large average size of new units supplied by the private sector compared to the average purchasing power of the population. Table 4-9. Iran: Recent Private Urban Housing Production, 1375-1379 Year New Average Floor Area per Year on Year Housing Units Floor Area (m2) Person (m2) Output Change 1375 (1996-97) 204,688 130 28.9 -------- 1376 (1997-98) 193,641 124 27.5 - 5.4% 1377 (1998-99) 210,994 129 28.7 + 8.9% 1378 (1999-00) 291,046 124 27.5 + 37.9% 1379 (2000-01) 339,659 122 27.1 + 16.7% Source: Report on the Housing Construction by the Private Sector, Tehran: Central Bank of Iran, 2001 (Annex 4.1., Table 5) 252. In the absence of an effective housing finance system, the size-distribution of housing units produced by the private sector suggests how the cash- and wealth-driving investment goals significantly affect the composition of output. According to the price affordability (Table 4-6), about 15 percent of the new units were readily affordable to a sizable percentage of the population. 31 percent of the units would fall under the categories of "protected" or "social" units. The total output in 1995 of about 210,000 units fell significantly short of the rate of new urban household formation. (Table 4-4). Table 4-10: Size-Distribution of Housing Units Produced by the Private Sector in 1995 Floor area Units 50 and 51-70 71-100 101-150 151-200 201-250 251 and Total Average less more Unit size Number 14,564 14,346 37,464 68,494 45,624 15,782 13,579 209,853 140 m2 Percentage 6.9 6.8 17.8 32.6 21.7 7.5 6.5 100 Source: Report on the Housing Construction by the Private Sector, Tehran: Central Bank of Iran, 1995. 253. The fragmentation of financing into various public housing programs. An unintended consequence of policies, inflation, and financial repression is the proliferation of special housing programs for various groups of public employees and other special groups in order to remedy scarce financial services. But these housing assistance 141Twenty years ago, in the1980s, Korea experienced distortions in its housing markets, but the high economic growth rate was a mitigating factor. See Bertrand Renaud, "Compounding Financial Repression with Rigid Urban Regulations: Lessons of the Korean Housing Market," Review of Urban and Regional Studies, Tokyo, 1,1 (January 1989): 3-23. 97 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector programs can only serve to complement, not substitute for, a market-based system.142 Because these special programs lend at rates significantly below the cost of capital in the Iran economy, they carry a significant element of subsidy that is de facto indexed to inflation, and they face chronic underfunding. These programs must ration their services, and access to them can easily become a kind of housing lottery. Iranian households that succeed in purchasing a new unit have to patch together small financial resources from a large number of sources. A successful household is forced to play the role of financial intermediary, but without specialized skills, professional experience, funding efficiency, or economies of scale. Access to home ownership today is based on wealth and prior savings (see Box HF-1). Under such conditions, embedding subsidies into housing loans by means of subsidized interest rates becomes income-regressive because a low financing-to-value ratio on the order of 30 percent requires that 70 percent of the house value be accumulated first, which is obviously easiest for higher-income and older households. 254. Lack of financing for the purchase of existing housing units. Internationally, a frequent asset-building strategy used by young professional households with little accumulated wealth but good expected lifetime earnings is the purchase of a cheaper existing housing unit. Such families follow their first-time purchase with a trade up for a new housing unit five to eight years later. Moving up the housing ladder by trading existing units takes longer, but overall social welfare is improved in these chains of move that benefit the households involved in them. The law in Iran currently prohibits the financing of existing units by financial institutions. When the 1983 Law for Usury-Free Banking was being drafted, the Islamic Consultative Assembly did not authorize financing for the purchase of an existing housing unit. Given high inflation and the decline of deposits and other funds at the Housing Bank, this ruling was perceived at the time as being of little practical significance. However, it is noteworthy that prior to this 1983 legal decision, in times of low inflation the records of the Housing Bank reportedly showed that up to 50 percent of annual credits in some years were granted for the purchase of existing units.143 255. In a situation of serious housing and credit shortages, the provision of credit to finance the acquisition or the improvement of existing housing, or to finance rental units, can have important efficiency and welfare benefits for exposed younger and lower- income households groups.144 The prohibition against financing existing, modest units145 lowers the value of the existing stock, the wealth of households owning such units, and 142For more details, see the subsidies chapter. Table 13. The Bank team identified 28 special housing programs funded with budgetary resources. These housing programs are of various scale, focus, and length in existence. In addition, most large-scale employers, whether public, nonprofit (bonyads), or fully private, have some housing assistance programs for their employees. 143The requirement to finance only new units has been lifted recently in the specific case of government officials borrowing from the Housing Bank under its program of loan-linked deposit accounts known as "Housing Savings Fund Accounts." 144A former public program for social rental failed and was re-directed into rent-to-own homeownership schemes, because the targeted developers/builders are not natural long-term landlords. A limited number of workers also enjoy very cheap rent from public companies and bonyads, but most tenants pay increasing market rents. Private investors get rental income exemptions for units of less than 120 m2. 145Except for the civil servants participating in housing saving schemes with the Housing Bank. 98 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector reduces the fluidity needed for an active housing market, in particular for lower-income households that may need to relocate to get a better job. It is worth examining whether such prohibitions serve either the interests of the construction industry or the welfare of families. The eligibility of housing loans should be extended to the purchase of existing units. This will be an important business decision that might require different loan processing rules, especially regarding the value of properties. Since all existing loans contain an element of implicit or explicit subsidy, a different pricing policy might be needed. Meanwhile, subsidy programs for targeted groups might remain focused on new housing and major housing renovations because of the desired short-term impacts on employment, economic growth and the expansion of the housing stock. Box 4-1. Home Purchase Strategies--How Successful Home Buyers Assemble Their Financing Share in total cost of less 11 21 to 31 41 51 61 71 more total purchasing a unit than to 30% to to to to to than 10% 20% 40% 50% 60% 70% 80% 80% Savings 12 11 13 15 21 6 11 8 3 100 Bank facility 0 12 41 36 11 0 0 0 0 100 Sale of other asset 62 17 15 2 2 2 0 0 0 100 Transfer from relatives 64 18 11 1 1 1 2 0 0 100 Employer loans 83 14 3 0 0 0 0 0 0 100 Tenant's advance payment a 68 11 20 0 0 1 0 0 0 100 Informal market finance 93 5 0 2 0 0 0 0 0 100 Others 97 3 0 0 0 0 0 0 0 100 a. When the tenant gives an advance payment, the interest rate on the money is counted as the monthly rent. For each 5 million Rials of advance payment, the tenant get a deduction in rent of 150,000 Rials per month. The advance payment is returned to the tenant upon departure. This frequency table provides an overview of the dominant strategies currently used by successful Bank Maskan borrowers. These rows reflect the main sources of fund listed from top down in order of significance for total financing. The columns give the frequency distribution in the proportion of total financing coming from each source. For instance, the top row shows that 21% of Bank Maskan borrowers rely on their own savings for 41% to 50% of the purchase of their housing unit. The second row shows that nobody can finance more than 50% of the housing purchas e price with a Bank Maskan loan. The table highlights how the purchase of a house in Iran is heavily dependent on prior wealth accumulation. The core source of funding is private savings that can cover up to 80 percent of the entire unit cost, exceptionally even more. Bank facilities provide only 10 to 50 percent of the financing, never more; most commonly from 20 to 40 percent of the entire funding needs. More details on the forms in which savings are accumulated would be useful to understand the structure of savings markets in Iran. Other funding sources are complementary to savings and the bank facility. These sources cover less that 30 percent of financing needs. They include: sales of other assets, financing by relatives, employer loans, mortgaging of a residential units, and as a last resort the informal market. The reliance on the tenant's advance payment is a frequent strategy, highlighting again the dependence on a significant level of prior wealth. 99 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 2. The Supply of Housing Finance Services 256. It is difficult to estimate precisely the flow of financing going to new housing construction every year. There are several reasons: the multiplicity of housing finance windows; differences in the types of financing products used; incomplete data on gross and net annual credit flows; and also, non-standardized accounting practices across programs that do not always separate credit financing from other data such household financing, direct budget contributions, or even subsidies in kind like subsidized land. Table 4-11 shows the level of intermediation in the sector--about 20 percent of annual housing investment comes from facilities granted by the Banking sector. Table 4-11. Iran--Level of Intermediation in the Housing Sector (1996-2000) Year / Billion Rials 1996 1997 1998 1999 2000 Outstanding Balance of 53,307.1 62,321.2 84,073 11,5840.,9 152,138.3 bank Financing to all sectors New Bank Financing to all 12,339.4 9,014.1 21,751.8 31,767.9 36,297.4 Sectors New Bank Financing to 2,775 3,399 4,374 9,052 10,002 Housing and Construction Share of construction and 22.5% 37.7% 20.11% 28.5% 27.6% housing from new financing New Bank Financing to 1,770.7 2,277.9 5,176.9 6,493.4 7,520.8 Housing Share of housing in total 14.3% 25.3% 23.8% 20.4% 20.7% new bank financing Outstanding Balance of 3,359.2 4,745.7 6,979.7 10,843.7 13,874.4 bank housing financing Annual Investment in the 16,665 21,336 22,181 28,980 37,400 housing at current prices Ratio of bank financing to 10.6% 10.7% 23.3% 22.4% 20.1% annual housing investment Sources: Central Bank of Iran. 257. A performance review of the first year of the Third FYP estimates the sources of funds for new housing to amount to IRR 30,411 billion (US$3.84 billion). Section 1 presents a discussion of the sector's dependence on direct private savings--estimated for the Persian year1379 at about 62 percent of total funding (see also Table 4-12). Section 2 discusses the role of the banking system, estimated to have provided about 33 percent of all funding. The primary focus is on Bank Maskan, which presently dominates the entire supply of housing finance services.146 146The World Bank report on housing subsidies covers direct funding by the public sector estimated in Table 11 at less than 5 percent of total funding. The subsidy review discusses the complex variety of resources that benefit housing directly and indirectly, in cash and in kind, on the demand side and on the supply side. 100 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Table 4-12. Iran: Sources of Funds for Housing in 2000­01 (1379) Source Percentage RI billion Public Budget 1.62 491.5 Government Companies 3.02 920.0 1. Total Public Sector 4.64 1,411.5 2. Banking system 33.22 10,100.0 3. Private savings 62.14 18,899.5 TOTAL 100.00% 30,411.0 Source: Review of the First-Year Results of the Third FYP, Tehran: MHUD, 2001. 2.1. Housing Finance: The Regulatory Framework 258. Implementing the development plans: The role of the financial sector. In the strong planning environment of Iran over the past two decades, the financial system has been used as an instrument of implementation of the plans. The system has not played the autonomous role in resource allocation and risk management that a financial system plays in a more market-oriented environment. The Iranian financial system has also been entirely bank-dependent and the ratio of stock-market capitalization to GDP was a very low 4 percent of GDP in the mid-1990s. Access to finance by private enterprises has been very difficult, as the nationalized banking system has been used primarily to fund state- owned enterprises. The ratio of bank claims on the private sector has been very low and amounted to only 22 percent of GDP in the mid-1990s.147 259. The present housing finance system. What are the main features of the present Iran housing finance system? The results from the financial policies of the past two decades could be summarized as follows. Since 1983, Iran has built a special circuit for housing finance that is segregated from the rest of the financial system. Bank Maskan, the housing bank, dominates that system and may represent about 30­40 percent of total bank funding of housing, depending on years, and very occasionally as high as 90 percent.148 260. The system of directed credit allocates 20 percent of incremental new credit to "housing and construction" where "construction" refers here to housing construction, as opposed to other building and civil engineering projects. 149 261. Without access to market-based long-term funds, Bank Maskan has restricted means to manage liquidity and interest risks. The bank allocates about 60 percent of its funding to short-term construction finance and only 40 percent to long-term home purchase finance. Other lenders who do not benefit from Bank Maskan's special privileges lend almost exclusively for short-term construction finance. 147See A Demirgüç-Kunt and R. Levine (2001). The mean values for the 70 countries were: 39 percent of GDP for stock market capitalization and 48 percent of GDP for bank claims on the private sector. (Table 3.1 in D-K and L, 2001, pp. 86­99). 148No consistent and complete table of all nonbank sources of loans has been obtained. 149Another 9 percent of credit allocation goes to civil engineering construction projects for a total earmarking of 29% to the" housing and construction" industry broadly defined. See section 1.2.3. 101 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 262. At present, Iran has a comprehensive regulatory framework that covers all aspects of banking. Monetary authorities at the Central Bank of Iran (Bank Markazi) control the evolution of public bank credit to the private sector. Bank Markazi closely regulates public bank credit activities on a continuing basis. The Money and Credit Council approves new product designs and their pricing. This regulatory structure leaves limited room for bank management autonomy to manage flexibly and to innovate. Banking spreads between deposits and savings rates are reflecting high administrative costs. 263. Most public commercial banks operate housing finance programs for a fee under contracts from various ministries to provide home purchase finance for the staff of these ministries and/or targeted social groups of special concern to these ministries. These housing programs carry significant subsidies such as interest subsidies, land sold for a fraction of the market price with other explicit or implicit subsidy features:150 · Bank Refah Kari-e garan (Welfare Bank for Workers) is one of the six public commercial banks. It offers various housing products. Some contracts are short-term home-improvement facilities. Others are long-term purchase finance facilities. For instance, in a contract the with the National Land and Housing Organization (NLHO), Bank Refah co-finances with the government home purchases products under the Ghadir Project with 4/7th from the bank's fund and 3/7th from the government. · Bank Sepah offers purchase facilities to military personnel under IRR 30 million and less than 15 years, usually through cooperative housing societies. · Bank Melli manages teachers home purchase facilities. · Bonyad Maskan. The Housing Foundation has low-income housing programs, and also manages some government programs. Other bonyads such as Mostazafan manage their own large housing projects. So do large state enterprises. · The Social Security Administration also offers construction finance and purchase finance. 264. Leading issues and reform initiatives. Access to the domestic capital market is critical for long-term funding and risk management in housing finance. The fixed-income securities market was effectively shut down in 1983 with the passage of the Law for Usury-Free Banking. This fundamental change affected government finance even more than housing finance. The volume of new Islamic capital market instruments such as the "partnership papers" has grown very slowly because of the lack of interest of the market in the yields and other features of the securities offered. In a series of stopgap measures, the government had to rely on CBI financing to finance part of public expenditures. Occasionally, the government has also funded housing finance programs such as in 1377 (1998­99) when the Money and Credit Council allocated IRR500 billion through the CBI to fund the "Eskan77" housing program that could not be financed autonomously by Bank Maskan and the banking system for lack of deposit resources. This lack of voluntary financial savings appears to be a financial market structure issue rather than a 150At least 29 such programs sponsored by various ministries were identified for the Bank. Details for the descriptions of these financial products were incomplete, including the number of loans, the value of new loans made each year, and the value of the total portfolio outstanding at the end of each period. 102 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector savings issue because the aggregate savings rate in Iran is high and close to 30 percent of GDP. 265. The financial authorities are now working toward developing the new securities market needed to improve the conduct of monetary policy. In the case of housing finance and urban development, Section 85 of the Second FYP Law of 1993 authorized the issue of partnership papers on the domestic capital market. However, only four housing or urban development security issues have been issued between October 1994 and February 2001.151 A new project led by the Ministry of Finance and the Economy aims to create a new corporation that would issue partnership papers and develop a market for such papers. This project is discussed in Section 3.3 below. Improperly designed and subsidized as proposed in some quarters, this new institution would merely amount to another direct-credit scheme and would not benefit long-term financial development in Iran. 266. Deposit funds mobilization is another leading issue. Because deposit rates have been consistently below inflation so far, Bank Maskan is unable to mobilize voluntary deposits fast enough to meet the rapidly rising potential urban demand. To fund this gap and respond to rapidly rising social pressures, the GOI and sector ministries are promoting under the Third FYP a variety of loan-linked deposits (also known as contractual savings for housing, or CSH). These CSH products carry significant medium- term financial risks. Their introduction also has longer-term financial development implications that need to be fully assessed.152 A further expansion of construction finance is a lesser priority, although untimely disbursement practices that raise housing costs through delays are reported. 267. Recent financial measures therefore aim to liberalize the Iranian housing finance system very gradually and to support innovations. These various measures include: · Since the start of the second FYP in 1373 (1994­95), the six public commercial banks are permitted to lend for housing purchases. However, these banks limit their housing lending to shorter-term construction finance typically using civil partnership musharaka contracts, strongly collateralized by the pledged housing unit. All these banks offer subsidized housing finance purchase products to their own employees. They also offer home improvement loans. · As noted in section 1.2, the charter of Bank Maskan was changed in 1999 to expand it asset powers to those of a commercial bank. 151The size of these four issues ranged between IRR35 billion for a new town company and IRR250 billion for a Tehran Municipality project. Maturities ranged between three and five years. The dealer bank for two of these issues was Bank Maskan. 152International experience in Europe and the Middle East shows that contractual savings for housing carry several important risks that must be properly assessed ex-ante: a large liquidity risk, potential dependence on costly subsidies that could become politically impossible to phase out, and as a result lasting distortions in the financial savings that in turn affects the efficiency of mortgage markets. There has been a serious debate across Central and Eastern Europe about the suitability of such instruments in modern financial systems. Contractual savings for housing were created in a different era of limited information technology and financial innovations, relatively closed economies, closed domestic financial markets, and significant directed-credit policies after World War II. In Western Europe they function as second loans, not as first mortgage loans. 103 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector · The Construction Industry Development Financial Company is a finance company active in the construction and housing sector. Its charter was recently expanded and it was renamed the Development Financial Company.153 The DFC is actively supporting the development of a capital market for housing participation paper and the creation of a centralized issuer of participation papers temporarily known as The National Corporation for the Long-Term Sale of Residential Units in Iran (or Metrom, see section 3.3 below). · Three private banks have begun operations: Parsian Bank, Saman Eghtesad, and Eghtesade Novin. They are not subject to directed-credit guidelines. Two of them (Saman Eghtesad and Eghtesade Novin) are offering housing finance products with returns ranging between 27 percent and 30 percent and maturities under five years, which limits their potential markets to a fraction of higher-income groups. These products include loan-linked deposits. 268. Bank Maskan dominates the supply of housing finance. An analysis of its operations can provide an understanding of the present constraints and reform needs of the entire system. Section 2.2 therefore now turns to a review of Bank Maskan operations. 2.2. Operations of the Housing Bank (Bank Maskan) 269. Bank Maskan was chartered in 1358 (1979) as one of four specialized public banks. It is the only specialized bank to finance housing. Article 3 of its charter expanded its assets power in 1999 to permit the same activities as commercial banks. (See section 1.1 above). 270. The housing bank constitutes Iran's de facto housing finance system. Yet as a bank it is a medium-sized institution in the overall financial system. Bank Maskan is the sixth- largest out of ten banks in terms of deposits (see Table 4-13); its assets represented 8.4 percent of the entire system (including small non-bank credit institutions not listed in the table). In terms of loans to the nonpublic sector, Bank Maskan is the second-largest lender because public commercial banks lend significantly to state-owned enterprises (SOEs).154 It is noteworthy that the Housing Bank's share of long-term deposits is small even compared with some of the commercial banks. The liquidity risk of borrowing short and lending long is a very significant issue for the present housing finance system. 153Non-bank Credit Institutions can be licensed by the central bank. Such institutions are financial intermediaries that mobilize resources through the acceptance of only long-term deposits and other funding facilities. Iranian law distinguishes two categories of non-bank credit institutions: a Specialized Credit Institution operating within the framework of a particular credit facility, or a particular economic activity; and a General Credit Institution functioning in a number of economic fields and offering various types of credit facilities. 154Here "nonpublic sector" refers to corporations that are not directly owned by the state. In terms of governance and incentives structure, a spectrum of corporate charters exists in Iran between fully public and fully private companies; the bonyads being one major example. 104 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Table 4-13. Size of Bank Maskan in the Iran Banking System, December 2000 Banks Total Deposits Of which Loans to Non- Total Assets Percent of (IRR Trillion) L-T deposits Public Sector Total Assets Melli 64.8 16.2 36.7 102.7 29.1% Saderat 41.3 9.7 25.9 61.7 17.5% Tejarat 24.8 7.2 13.6 38.1 10.8% Mellat 28.2 6.9 18.4 40.9 11.6% Sepah 22.4 5.6 13.1 35.0 9.9% Refah 6.4 0.9 5.3 10.4 3.0% Commercial 187.7 46.5 113.1 288.8 81.9% Maskan 12.1 1.9 27.0 29.5 8.4% 3 Others 8.5 0.7 24.7 33.7 9.5% Specialized 20.6 2.6 52.7 63.2 17.9% Source: Central Bank of Iran 271. At the end of year 2000, Bank Maskan had more than 7,140 employees to manage IRR29.8 trillion in assets (or $3.8 billion), 5.6 million deposit accounts, and less than 2 million loans.155 The bank's network of branches expanded by 37 percent during the Second FYDP (from 453 branches in 1995­96 to 719 branches in September 2001). This expansion reflects the increasing volume of business Bank Maskan has been conducting in smaller cities. 272. There are now 61 cities with a population of more than 100,000 people. Over the past three years Bank Maskan has rapidly expanded its network of branch offices throughout the provinces. 273. The housing bank services a very large number of deposit accounts and credit operations across the country (see Table 4-14). Those accounts are on average very small. The population seems to open them as options to get into the queue for a possible future housing loan. During the six-year period (1375­1380, i.e. 1996­2002) the number of deposit accounts has expanded rapidly by 88 percent, up to a total of 6.51 million accounts by March 2002. The average size of each deposit was IRR3,048 million, or US$381. Bank Maskan incurs significant administrative costs to service of the many small-deposit accounts in smaller cities. 274. There is no yield curve in Iran. The central bank fixes the minimum and the maximum rates of return on loans made to major economic sectors. The rates for construction and housing are currently 15 to 16 percent. In practice, a wider range of rates is observed across a variety of special programs. Bank Maskan financing activities in smaller cities are considerably greater than in Tehran (see Table 4-15). The reason for this is more regulatory than commercial. In order to maximize the number of subsidized credits, the supervisory authority has placed a low ceiling on the maximum credit amount the housing bank can offer in Tehran and the other cities. 155Has Bank Maskan high administrative costs? For comparison, in 1998 the Government Housing Bank of Thailand had 2,114 employees to manage total assets US$9.78 billion, a portfolio of more than 440,000 loans in a network of 202 branches and sub-branches in a country of 62 million people. A GHB employee managed $4.63 million. A Bank Maskan employee managed only $0.53 million in year 2000. 105 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Table 4-14. Housing Bank Number and Regional Distribution of Deposit Accounts Tehran Large Cities Other Cities Total Year Accounts Amount Accounts Amount Accounts Amount Accounts Amount 1375 655,090 IRR 972.0 919,632 IRR 887.2 1,893,724 IRR 990.6 3,468,446 IRR 2,849.9 1376 758,620 IRR 1,855.6 1,019,326 IRR 1,384.1 2,073,232 IRR 1,628.5 3,851,178 IRR 4,868.1 1377 887,040 IRR 3,051.3 1,185,516 IRR 2,107.6 2,350,628 IRR 2,445.2 4,423,184 IRR 7,604.1 1378 1,000,256 IRR 4,127.6 1,336,504 IRR 2,899.7 2,582,353 IRR 3,171.7 4,919,113 IRR 10,199.0 1379 1,188,819 IRR 4,990.0 1,537,389 IRR 3,748.0 2,858,908 IRR 4,082.5 5,585,116 IRR 12,820.5 1380 (01/02) 1,451,635 IRR 8,157,031 1,798,750 IRR 5,663,258 3,262,135 IRR 6,032,309 6,512,930 IRR 19,852,598 Percent of 22.3 41.1 27.6 28.5 50.1 30.4 100.0 100.0% Total in 1380 Average 5,619.20 3,148.45 1,849.19 3,048.18 1380 Deposit (IRR 1,000) US Dollar 702.4 393.55 231.15 381.02 Source: Bank Maskan Annual Report, Tehran: Bank Maskan, various years. Table 4-15. Housing Bank: Annual Loans (IRR billion) Tehran Large Cities Other Cities Total Year No. Amount No. Amount No. Amount No. Amount 1375 21,262 RI 1,002.4 40,199 IRR 856.5 86,480 RI 1,023.8 147,941 RI 2,882.80 1376 24,337 RI 1,197.7 47,451 IRR 1,247.4 103,953 RI 1,549.5 175,741 RI 3,994.70 1377 35,573 RI 2,037.4 69,149 IRR 1,845.7 181,090 RI 2,606.1 285,812 RI 6,489.10 1378 47,883 RI 2,932.9 71,728 IRR 2,745.5 138,644 RI 3,774.3 258,255 RI 9,452.70 1379 (00/01) 50,273 RI 3,643 64,832 RI 2,902 101,894 RI 3,900 216,999 RI 10,445.60 Percent of Total in 23.2 33.5 29.9 29.8 47.0 36.6 100.0 100.0 1379 (2000/01) 1380 (01/02) RI 4,212 RI 3,981 RI 4,263 RI 12,456 Percent of Total in 33.82 31.96 34.22 100.0 1380 (2001/2) 1379 Average 69.70 I 48.03 37.57 48.14 Credit (RI millions) 1379 Average 8,804 6,067 4,746 6,080 Credit (US$) Source: Bank Maskan Annual Report, Tehran: Bank Maskan, various years. 275. This ceiling on the total credit size is misaligned with prevailing prices for new housing in Tehran and some of the largest cities; as a result, financing-to-value ratios are very low in these markets. This means that a very significant amount of prior wealth is required to borrow from the Housing Bank in major urban markets, as shown already in BOX HF-1.156 To see the regional impact of the credit ceiling more explicitly, see Table 4-16, which shows the price per square meter of housing units transacted by real estate 156Maximum credit amounts are IRR 30 million for purchase loans made by commercial banks, which further discourages them from financing housing. The maximum credit amount permitted to the housing bank is IRR 50 million. Note that the calculated average credit in Tehran is IRR 69.7 million because the figure includes loans for multiple units bundled into a "mass housing" reporting line. 106 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector agencies in Tehran and the four next-largest cities. Presumably, these transactions involve a mix of new and existing housing units. Table 4-16. Iran: Average Price per Square Meter of Housing Units Transacted (IRR ) City 1375 1376 1377 1378 1379 1380 1381 "Protected" 75 m2 "Protected" (1996- (1997- (1998- (1999- (2000- (2001- (2002- Unit 75m2 Unit 1997) 1998) 1999) 2000) 2001) 2002) 2003) 1379 (2000-2001) (US$) Tehran 1,603 1,560 1,558 1,755 2,251 3,198 4,810 168,825 21.325 Esfahan 642 756 906 1,000 1,136 1,411 2,215 85,200 10.762 Tabriz 583 663 742 831 942 1,204 1,671 70,650 8.924 Shiraz 686 796 823 922 1,043 1,263 1,945 78,225 9.881 Mashad 530 620 768 820 920 1,997 1,983 69,000 8.716 Source: Statistical Center of Iran and World Bank estimates based on consultants reports. 276. The notional price of a unit of 75 m2 is given in the last column of Table 4-15. The rationing effect of the credit ceiling of IRR 50 million is apparent. Its impact on high- priced cities is worsening given rapid rates of appreciation in housing prices.157 277. Bank Maskan's regulatory privileges and housing-related tax benefits. Regulators have granted the housing bank a number of regulatory privileges that are not available to other banks or finance companies potentially interested in housing finance. The CBI has established low statutory reserve requirements for Bank Maskan deposits products: · 2 percent for loan-linked savings deposits · 10 percent for other types of deposits 278. Reserve requirements for commercial bank deposits are significantly higher: · 20 percent for call deposits, Gharz-al-Hasaneh deposits, and for investment deposits under one year · 10 percent reserves for investment deposits one year or longer 279. Reserves requirements for finance companies deposits are: · 15 percent for Gharz-al-Hasaneh deposits and investment deposits under one year · 10 percent for investment deposits for investment deposits two years or more · Only for the housing specialized Development Finance Institution is the reserve requirement 10 percent for all types of deposits. 157The Budget Law of 1373 (1994­1995) defined three main categories of housing units for policy purposes: "Free," "protected" (or "assisted" housing), and "social" housing. Social housing units have a maximum floor area of 50 m2 across the country. Protected units have a maximum of 75m2 for Tehran, Esfahan, Tabriz, Shiraz, and Mashad; and, a maximum area of 100 m2 for all other cities. In Tehran, the maximum financing that the buyer of 75m2 unit could expect in 1379 was only 29.5 percent of the price. 107 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 280. Article 55 of the Plan Law specifies that 3 percent of the statutory reserves deposited by banks at the CBI will be allocated on the basis of one percent each of three specialized banks (Agricultural Bank, Housing Bank, Bank for Industry and Mining). The basis for calculating this allocation is the level of reserves at CBI in year 1378. 281. Securities issued by Bank Maskan qualify for the 20 percent housing sector lending requirements of other banks, thereby permitting a favorable rate of return for Bank Maskan on its securities on the interbank market. 282. The second FYP 1374­79 has allocated part of the funds of insurance companies to the housing sector. No further details are available. Returns from deposits are tax-exempt for all banks and finance companies, including Bank Maskan. 283. Among the tax benefits to housing are the following: · The monthly installment on housing loans and housing facilities are deductible from gross income for income tax purposes. The ceiling for deductibility is based on a maximum floor area of 120 m2. · Article 138 of the Plan Law specifies that all "mass housing" builders are exempt from taxes on the first-time sale of residential units. 284. Funding structure and main types of deposits of the Bank Maskan. In the framework of Islamic banking set by the 1983 Law for Usury-Free Banking, banks are authorized to accept deposits of two main types: · Gharz-al-hasaneh deposits, of which: o Current deposits are entirely interest free deposits; o Saving deposits are also not entitled to any interest. But in order to attract and encourage such deposits the banks may pay prizes in cash or in kind through two annual drawing of lots. · Term investment deposits provide a rate of return. The range of maturity options has expanded over time. By the end of 1379 (March 2001) the rates on term investment deposits were regulated as follows: o special short-term investment deposits: 8 percent o short-term investment deposits: 10 o one-year investment deposits: 14 o two-year deposit: 15 o three-year deposit: 16 o four-year deposit: 17 o five-year deposit: 18 285. High inflation has ensured negative rates on investment deposits and makes it very difficult for Bank Maskan to attract voluntary savings (see Figure 4-1). The main instrument offered today by the housing bank is a loan-linked contractual deposit that is considered a Gharz-al-hasaneh deposit. This contractual deposit, like such products used 108 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector in France, Germany, and parts of Central Europe trades off a low return during the savings phase (in Iran a zero return) for the prospect of credit at a very low rate during the borrowing phase. Table 4-17 gives the basic composition of deposits at Bank Maskan.158 Table 4-17. The Housing Bank: Main Types of Deposits, in IRR billion Year 1996­97 Percent 1997­98 1998­99 1999­00 2000­01 2001­02 Percent 1. Loan-linked deposits 1,952 68.5 3,277 5,013 6,421 7,551 9,909.5 49.9 2. Term investment deposits 358 12.6 928 1,834 2,792 3,928 7,746.3 39.0 3. Demand deposits 540 18.9 663 757 986 1,341 2,196.7 11.01 Total 2,850 100.0 4,868 7,604 10,199 12,820 19,852.5 100.0 Source: Bank Maskan Summary Report of Activities and World Bank estimates based on consultants reports. 286. Deposit rates and banking spread. The summary structure of deposits at Bank Maskan in September 2001 and March 2002 is shown in Table 4-18. This table shows that 61 percent of deposits at the bank were classified as interest-free, which is the main reason why the bank was able to distribute profits to its depositors at the beginning of 2002 for the first time since the scheme started. A calculation of the weighted returns paid on all Bank Maskan funds based on a more fully detailed table of deposits yields a very low overall cost of funds of only 5.65 percent.159 Considering that the weighted average return on assets was 15.4 percent in September 2001, the estimated banking spread at Bank Maskan appears to be very large, at 9.75 percent. Table 4-18. Structure of Bank Maskan Deposits September 2001 March 2002 Type of Deposits RI b Percent RI b Percent Current interest free 994.40 6.44 1,200.7 6.0 Saving interest free 8,663.40 56.07 10,905.5 55.0 Term investment deposits 2,405.00 15.57 2,999.3 15.1 L-T investment deposits 2,862.60 18.53 4,631.6 23.3 Other deposits 42.50 0.28 115.4 0.6 TOTAL 15,450.00 100 19,852.5 100 Source: Bank Maskan Summary Report of Activities 287. Main types of credit The 1983 Law for Usury-Free Banking (LUFB) changed all the financing products available for housing until that date. Out of the various types of 158As indicated in Table 4-7, for monetary policy purposes most of Bank Maskan deposits are apparently considered short-term deposits by the central bank. 159This estimate excludes the interest paid to depositors, in housing saving schemes, who decide not to take the housing loans and as a result receive their deposit back with interest. About 30­40 percent of depositors in this scheme do not take out housing loans. 109 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Islamic contracts defined as permissible by the LUFB, four main types contracts are used in housing finance; Namely: · Civil partnership in the construction of residential units · Installment sales160 · Hire purchase · Jo'alah (under Jo'alah, one party who is the employer (Ja'el) is committed to pay a certain amount of compensation (Ja'al) to another party, the agent or contractor, for a certain work. 288. The commercial autonomy of Bank Maskan in designing financing products is restricted by the LUFB under which to the CBI is fixing a minimum and maximum rate of profit for banks in their joint venture and also fixes minimum prospective rates of profit for the various investment and partnership projects. Within thisIslamic finance framework, financing instruments have been refined and made more flexible, as can be seen in the case of loan-linked deposits instruments introduced during the Third FYP. 289. Article No.10 of the LUFB permits banks to construct low-priced residential units for sale on installment or hire purchase. The housing bank, as the only specialized bank in housing, operates within this framework.161 See Table 4-19 for the breakdown of housing credits provided by Bank Maskan in 1380 (2001­02). Table 4-19. Bank Maskan: Housing Credit Instruments Type of Contract Description 1380 (2001-02) Number Amount Percent 1. Civil partnership Linked with saving Single units 16,206 648,660 5.0 Not linked with saving single units civil servant _ _ others 850 16,001 0.1 Cooperative Housing 229 47,294 0.14 Building Complex 818 316,531 2.5 Note No.29 14 88,986 0.7 2. Credit for Special Azadegan and Ashayer 960 18,550 0.1 Groups Janbazan and Martyrs' family 1,898 58,683 0.5 3. Installment sales Housing purchase 115,902 8,588,113 69 Banks civil partnership 30,490 2,007,107 16.1 4. Other contracts Different sectors of economy 1,524 37,033 0.13 5. Jo'alah 26,600 204,415 1.6 160Unit installment sale contracts have been put into effect only in the following ways: (1) Sale of the bank's share generated from civil partnership in the construction and completion of residential units with real persons or legal entities. (2) Sale of residential units constructed by the bank. Then the contract that is applicable in the sale of the constructed residential units is the hire purchase contract. 161As already discussed, the Islamic Consultative Assembly did not authorize the financing of the purchasing of already built units. But this decision has been selectively rescinded for government officials, see the "Housing Saving Fund" line for government officials in Table 4-19. 110 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Type of Contract Description 1380 (2001-02) Number Amount Percent 6. Gharz-al-Hassaneh (for bank employees) generated by partnership 33,079 182,619 1.5 7. Other kinds of credit 10,966 243,629 2 GRAND TOTAL 239,953 12,457,616 100.0 Source: Housing Bank , Planning and Organization Dept . (in IRR th) 290. Loan-linked deposit accounts and liquidity risk. The new deposit products introduced just before the Third FYP functionally link both sides of the balance sheet of Bank Maskan. The five main types of loan-linked savings accounts--also known as contractual savings for housing--offered by the housing bank represent about 70 percent of its entire deposit base. These deposit contracts carry with them significant elements of liquidity risk, depending on the timing and amount of credit that clients might choose. A critical stability component is the percentage of clients deciding not to exercise their financing rights during a given period and leaving their money with the bank. The conditions under which clients are likely to exercise their option to borrow deserve careful analysis by the housing bank and the regulatory authorities. (This liquidity risk issue is addressed in section 3.4 below) 291. For instance, in Tunisia in the late 1970s, a housing finance institution called CNEL relied exclusively on loan-linked deposit accounts. Given the extreme shortage of housing finance in the country, CNEL was very successful during the start-up years and it became extremely liquid as new contract money poured in. CNEL began offering anticipatory loans to earn income on its excess liquidity and also to meet housing policy goals. Soon enough, however, as waiting periods were completed and participants started to exercise their contract rights, the balance between inflows and outflows reversed itself. In the early 1980s, CNEL experienced a severe liquidity crisis and had to be closed down. A trigger of the run was that holders of deposit accounts had concluded that waiting lines to borrow were getting longer and longer and their chances to borrow too slim. The largest and most significant depositors were among the first to withdraw their accounts from the system. With government financial support, CNEL accounts had to be transferred to a newly created Banque de l'Habitat (BH), which is still in operation today. Operating rules used by BH were changed--and most important, these types of contracts became complementary to first mortgage loans, instead of being promoted as substitutes.162 The lesson of that crisis is that Iranian supervisory authorities need to carry out a thorough analysis of alternative liquidity scenarios for each type of CSH product and identify prudent ratios between deposit and credits. Liquidity lines of credit might be signed, but at a price. 292. Bank Maskan offers several types of contractual savings products. These contracts are complex. They include a menu of contract options that change according to the socioeconomic characteristic and profession of the depositor-saver. For these reasons, two tables are presented. Table 4-19 provides a basic quantitative overview of these loan- 162See also, Michael Lea and Bertrand Renaud, "Contractual Savings and Their Suitability for TSE Financial Reforms." Washington DC: World Bank Policy Research Paper 1516, 1995 at http://www-wds.worldbank.org/ 111 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector linked deposit" products. Then Table 4-20 aims to provide more details of the options available to various individuals in the various products offered. It also covers the new Youth Savings Accounts. Yet Table 4-21 remains only indicative of the variety of contracts offered. Table 4-20. Saving Funds for Housing: Types of Loan-Linked Saving Products, 2002 Types of Minimum Minimum Maximum LOAN AMOUNT Type of Loan-Linked average saving period multiplier Max. Annual rate Maturity housing unit Saving saving (months) (loan to amount of return (%) (years) Products (RI m) savings) (RI m.) 1. All social 5-7 6-12 7 35-50 15-16a 12/15/18 First hand, groups Newly built 2. Civil -- 6 7.5 25 15-16b 20 Newly built or servants existing unit 3. Senior -- 9 7.5 25 15-16b 20 City-specific officials and maximum size bank and price c employees 4. Civil 2 5 10 25 15b 20 servants special d a. To borrow the maximum of 50 IRR million the minimum average saving is IRR 7 million and the minimum period is one year. b. Rates usually paid to banks. Discounts or subsidies to borrowers are not shown. c. Floor area under 75 m2 in Tehran, Mashad, Esfahan, Shiraz. Floor area under 100 m2 in other cities d. Married, not owning a house already. Source: Bank Maskan 293. Quality of housing collateral guarantees163. According to the 1983 Law for Usury- Free Banking and relevant by-laws, the only security for granting financing facilities to buyers of residential units (through installment sale or hire purchase) and construction funding (through civil partnership) is to mortgage the property involved. In case of insufficiency of collateral, only an additional property could also be pledged. Collateral substitutes appeared not to be permitted. In fact, substitutes are now explicitly discouraged in the new Law of No Obligation to Give Property as Collateral to Banks and Other Public Institutions and Companies, passed in 2001 (3.27.1380). According to this law, "no property outside the project could be pledged against the inclination of the client." The acceptable collaterals are assets within a wide range from the liquidity point of view, including certificate of deposits, partnership papers checks, promissory notes, etc. So far, however, none of these new provisions has been adopted for housing finance. 294. Given the shortage of housing finance and the very low credit-to-value ratios of current financing facilities, credit risk in housing finance has been low for the housing bank. The situation could change drastically, however, when macro-economic stability is achieved, real profit rates after inflation on financing facilities turn positive, and LTV ratios increase because bank deposits become attractive. The quality of foreclosure procedures on mortgage guarantees will become important to the soundness of the 163 Source: World Bank estimates based on consultants reports. 112 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector system. Currently, Iranian experts find foreclosure procedures slow and complicated by the lack of coordination across regulations. The only practical avenue is case-by-case negotiation. Table 4-21. Loan-linked Account at Bank Maskan: Contract Features HSF Account HSF Account HSF Account Housing Deposit Youth Housing Type 1 Type 2 Gvt Staff Fund for Gvt Savings Staff Account Maximum Up to IRR 35 7 times the 7.5 times up to 10 times up to Up to 30 times credit million deposits up to IRR IRR 25 million amount saved amount max. IRR 50 25 million million Minimum RI 5 million 6 month 6 month Minimum Minimum deposit set saving at the (in one time, minimum wait minimum wait deposit of IRR 2 by city. 15-year time credit is or every 6 million to get schedule of required granted months) maximum loan annual deposits. But can be used after 5 years Rate of 15-16 percent 15-16 percent Rising interest Reduced rates of 2 percent discount return discounts return apply if from the profit rate as charged on applies to first clients accept a regulated by central the credit IRR 15 million shorter maturity bank at the time as waiting period is extended 5-8 percent subsidies possible for certain units Credit 12-year loan 12-year loan 20-year maturity Maximum of 20 maturity for waiting for waiting for all contracts years period up to period up to 12 month: 12 month: 15-year loan 15-year loan Waiting periods Waiting for Waiting for by tranches of period 13 -18 period 13 -18 10 months months months 18-year loan 18-year loan for waiting for waiting period >19 period >19 months. months. Type of unit New unit. New unit. borrowers can New or existing Account holders on financed Maximum Maximum finance an units. Maximum priority list. City price price existing unit LTV of 90% specific price applies. unspecified unspecified Other Yes, but not Yes, but not Youth account can be features provided here provided here moved to other contracts, but not the reverse Source: Compilation by the World Bank using unpublished information. 113 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 3. Reform Issues in Housing Finance 295. Section 3 outlines the reform issues suggested by the preceding evaluation of Iran's housing finance system. 3.1. Strategic and Regulatory Issues 296. Iran is still following the model of a specialized circuit for housing finance, from which most countries are rapidly moving away in their efforts to achieve better systemic risk management, expand resource mobilization and stimulate product innovations. As already discussed, in Iran, commercial public banks tend to limit their housing lending to shorter-term construction finance. The specialized housing bank is practically the sole provider of long-term credit to households. This situation reflects its mandate as a specialized public banking along with its related regulatory privileges. It must be noted that current effort to develop a secondary mortgage market will move Iran toward a housing finance system fully integrated into the financial system. 297. Toward a well-integrated housing finance system. Provided that macroeconomic conditions continue to improve, the proper strategy for Iran is to expand the housing finance system by bringing both deposit rates of return and financial profit rates on financing up to the true level of the cost of capital in the economy. Housing finance reforms, however, are dependent on the overall speed of financial liberalization. When and where subsidies are needed, the aim should be to separate them from the financing by favoring direct demand-side subsidies not channeled through the banking sector. At present, the numerous government subsidy programs are not leveraging scarce budget resources effectively. 298. These government subsidies should aim to leverage in private resources through better incentives given to potential program participants. As Section 1 stresses, under the present financing structure, housing market dynamics contribute to macro instability in aggregate demand. Housing finance deregulation is also dependent on a more responsive physical housing supply system. Otherwise shifting the demand by means of more financing without improving the responsiveness of land markets to demand and construction and real estate development processes would only result in higher housing prices. It may be worth repeating that subsidies embedded in the present rates below inflation are in fact indexing the subsidy scale to inflation: the higher inflation, the larger the subsidy. A priority is to gradually deregulate the market pricing of the housing loans made by all public banks, at least for the loans to middle- and upper-income groups. Subsidies may still be targeted to targeted vulnerable groups. 299. The speed of these reforms for the housing finance sector may depends on: · The deregulation pace of housing loans vis-ŕ-vis other credit sectors. 114 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector · The exposure of regulated public banks to the competition of the new private banks, not subject to similar allocation and return rules. · The needed institutional and regulatory reforms of the housing bank toward equal treatment among all providers of housing finance. 300. The regulatory ceiling for housing credit amounts164 has been gradually eroding the affordability of housing loans. It is not clear whether the housing bank carries out detailed annual surveys of its borrowers. Such surveys would most likely show that access to financing favors middle- to upper-income families, because of the required large down payment to acquire housing in large cities. There are two options: either the existing ceiling is differentiated between large and smaller cities on the basis of surveys; or the ceiling is simply replaced by a reasonably prudential loan-to-value ceiling, for example of 70 percent. In that second case, regulations of all prospective lenders should require, first, a market appraisal of the house value, and, second, an analysis of repayment capacity as part of the bank's underwriting policy. Note that the whole system of housing saving funds should be reformed before increasing the corresponding maximum financing amount because of the subsidies and risks embedded into these products. 301. Credit rationing and the quality of the collateral have so far secured a good portfolio performance, notably at Bank Maskan, where only 1.7 percent of credits are more than three months late. Banks do not feel the need of strengthening their credit risk management. Yet, they do not know the detailed nature of portfolios, and their information systems are not developed. In the process, risks are presently hidden and not really managed. 302. Given the housing and credit shortage, no financing is available for either the purchase of existing housing165 or to help finance rental investments.166 Some financing is available for improvement of existing housing, but for limited amounts and with no interest rate subsidy167. This adverse situation reduces the existing stock value, the wealth of households, and the fluidity needed for an active housing market, in particular for lower-income groups. The eligibility of housing loans should be extended, even if some related subsidy programs for targeted groups might remain focused on new housing and major renovation because of the desired short-term impacts on employment and economic growth. 164Already noted as being IRR 30 million for commercial banks, and up to IRR 50 million for the members of the housing saving funds of the housing bank. These amounts are significant in small cities, but they cover only a small portion a housing unit price in Tehran (250 million). 165Except for the civil servants participating in the special housing saving scheme of the Housing Bank. 166A former public program for social rental failed (and was redirected into rent-to-own homeownership schemes), because the targeted developers/builders are not natural long-term landlords. A limited number of workers also enjoy very cheap rent from public companies and bonyads, but most tenants pay increasing market rents. Investors get rental income exemptions for units of less than 120 m2. 167The loan ceilings are 8m Rials in Teheran and 6m Rials in other cities. The minimum rate is 23 percent. This facility is offered also by some commercial banks. 115 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 303. The present specialized housing finance system is at a dead-end. The Housing Bank has reached its maximum production capacity because it is unable to offer a long-term positive rate of return to savers under market conditions. Positive guaranteed rates are offered at the moment168 e.g., 17 percent for five-year deposits when inflation is 12 percent in early 2002; but this is not sustainable if/when inflation returns. The bank is already over-exposed to systemic and liquidity risks given its very limited capital. Its ability to withstand its vulnerability is predicated upon keeping its regulatory privileges. Commercial banks have currently no incentives to lend more long-term housing loans, first, because alternative credit activities are more profitable, second, because they have unequal regulatory funding tools when compared to Bank Maskan, and, third, because they face significant market and liquidity risks that are not well priced in the current inflationary context. 304. Redesign of housing credit products. Given the chronic inflation experienced by Iran, a market-priced, long-term, fixed-rate financing instrument needs to include an expensive premium caused by inflation uncertainties. The result is the front-loading of repayments and a sharp loss of affordability, especially for young potential borrowers. A new generation of more affordable housing credits can be designed by adjusting the credit return every three or five years to a transparent index reflecting the evolution of funding costs. The market risk for lenders can then be reduced without exposing borrowers to excessive rising payment to income ratios and credit risks, provided that the frequency of adjustment is not too rapid. An in-depth analysis of credit affordability by potential clients will be needed. The housing finance system may then become more resistant to inflationary shocks, and so would the overall economy. 305. The affordability of housing loans could be more significantly improved even during inflationary times, without exposing lenders to further losses, by indexing at least partially both housing debt and credit installments. The index must (a) be transparent and not subject to administrative fiat, and, (b) reflect the best compromise between the lender's costs of funds, the borrower's nominal incomes, and the housing value. A housing price index may represent a second-best proxy to a consumer price index. Further work is needed to meet Islamic finance principles in designing such indices.169 Partial indexation may be introduced in order to reduce the credit risk. 306. Such design proposals should be analyzed and compared with the recent proposal of the Ministry of Housing now under review by the central bank for new gradual payment, fixed-return loans (GPM) in which nominal periodic payments are fixed for limited periods of time, and regularly increased according to a pre-set ratio. GPM products have been discussed internationally for three decades, but they have met with 168As the housing bank has had excess money since January 2002, it has distributed profits to depositors for the first time. Five-year deposits received 4 percent above the guaranteed rate and one-year deposits received 1 percent above the guaranteed rate. 169Musharakashares may be gradually sold through long-term installments, to create a debt indexation. Or the installments may be directly adjusted according to the housing value. Or some new ijara leasing contracts (with gradual equity participation) may adjust rents to inflation or housing prices. Problems of "negative equity" may need attention. Negative equity arises when the amount of financing to repay becomes larger than the value of the housing unit. This situation can arise due to accelerating financial costs or to falling housing prices, or a combination of both. 116 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector very mixed success in practice. Why? Because they improve initial credit affordability but they do not reduce the significant market risk of lenders. They also require a conservative forecast of long-term inflation that is nearly impossible to make. If the pre- set ratio actually exceeds observed inflation, the payment pressure on clients will increase along with credit risks triggered by payment shocks at the end of the initial fixed period. A conservatively low ratio is then needed that would probably not be higher than 5 percent yearly in Iran, thus limiting the expected affordability gain--and the ability of the lender to pay a satisfactory return to depositors. 307. Another regulatory step would be additional prudential banking capital requirements to better protect banks against both credit and market risks. Given inflationary uncertainties, a market-determined fixed-rate housing loan may be unreasonably expensive and risky. 3.2. Specific Housing Bank Activities and Products 308. Special privileges. The Housing Bank draws special benefits from its privileged status as of a public specialized bank. These privileges are granted in order to reduce its cost of funds and to finance cheaper long-term loans, through: · Contractual housing saving schemes170 · Lower deposit statutory reserves171 · Privileged access to special CBI refinancing lines172 · Refinancing lines from commercial public banks173 309. Every year, the housing bank balances its operating budget by taking advantage of its special refinancing options, but the bank has no real incentive to further improve its longer-term funding strategy. The bank has been fully exploiting its cheaper statutory reserves in order to better remunerate its depositors, and it has worked out several attractive housing saving schemes, in order to continue its steady production of housing loans.174 310. Loan-linked deposit products: The risks. The design of the loan-linked deposits promoted by the housing bank may create new, large contingent risks for the state because the liquidity equilibrium of these programs in the medium term will require that 170As reported in Section 2, the general program of housing saving funds has been complemented by two new subprograms designed with slightly different variants for employees and youth saving funds. The common principle consists in not remunerating these term savings (only 10 percent is paid back if no credit is used), and instead to offer attractive and transferable housing credit rights, with a high multiplier of credit amount when compared to savings, a cheaper credit rate (with discount between 2 percent and 4 percent) and long maturities (15 years for the main program). In addition, payments for these products are income tax deductible. 171Bank Maskan deposit reserve ratio is set at 2 percent versus at least 10 percent for the other banks, sometimes up to 20 percent for particular types of deposits. 172Granted at more favorable conditions than the usual market-oriented and short-term overdraft facility. 173Recall that Bank Maskan is not charged at full market conditions because its refinancing is eligible for the banks' mandatory 20 percent credit allocation 174The estimated volume is stable in real terms. 117 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector a high proportion of savers does not exercise their personal, transferable credit rights. Such expectations of a significant share of non-borrowers are not consistent with the economic incentives embedded in the present loan-linked deposits.175 The system can then generate longer queuing effects, and lead to a sharply discounted value of these credit rights. We have already referred to the lessons of CNEL in Tunisia two decades ago. 311. In order to improve its short-term liquidity, the housing bank may well have created a delayed liquidity crisis that could explode within a few years, to the detriment of the central bank as the last-resort provider of liquidity. A dynamic supervisory model of liquidity is urgently needed. The proposed multiplier176 between the saving and loan amounts should be reduced, as well as the current mismatch between the terms of the saving and credit maturity. 312. Contractual savings schemes have been used in a number of countries to expand funding for housing finance by facilitating the equity-building-up phase of households and revealing their financial discipline, but these products cannot function durably as the only credit instrument for an housing investment. Contractual savings work as a complementary tool to other sources of funding. In the case of Iran, these products could be matched with land and other types of housing vouchers for lower-income groups. They can function as private complementary mortgage finance for higher-income groups. 313. Partial analyses of contractual savings products for housing are very risky. For instance, the Ministry of Housing proposes to the central bank to increase the credit ceiling from 50 to 70 million for the participants of the housing saving funds. The housing bank has proposed to the government the increase in the minimum period to obtain loans from 12 to 18 months. The ministry knows that such an increase would improve housing affordability, but does it also appreciate that new ceilings will worsen the liquidity disequilibria for these products that now represent 60 percent of the housing bank's deposit base? A general reform of all the parameters of these contractual housing funds is therefore needed. 314. Once the liquidity management risks for the housing savings fund products is fully understood and tightened, such products should be made available to every public or private bank that wants to offer it. This broadening of the housing finance system should be done within the context of a unified and standardized regulatory framework applicable to all interested financial institutions. 175Housing Saving Funds participants gain more from the leveraged discounted credits than they lose in the returns to their deposits. They have a strong incentive to exercise their options to borrow. The main disincentive to participate in these programs results from the low credit ceiling. 176The loan-linked deposits in Iran have evolved and currently are estimated with very short (less than a year) duration of deposits. Should the rental market develop, these schemes could facilitate the later purchase of a home by young couples who could start by living in rented accommodations while at the same time paying into long-term deposits until they are entitled to receive a loan. 118 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 3.3. Developing Secondary Mortgage Markets 315. A current policy initiative aims at the mobilization of funds for housing on the capital markets. Capital market access could help finbance housing credits, which are perceived as a low-risk growing business activity, provided that returns after inflation are attractive. Public pension funds and insurance company appear to be interested. For example, the pension fund for civil servants (CSRO) holds a major part of its assets into public illiquid shares, and would prefer to invest in liquid assets with a satisfactory return. Most issues of participatory papers have been oversubscribed, but the identity of these investors is unknown because securities issued were bearer securities. Technically, Islamic securities could be designed as simple over-collateralized bonds, or as participatory papers used to securitize long-term housing-credit receivables. 316. Iran's proposed securitization: What can be expected?. Going by international experience, the development of secondary markets is beneficial in the long term and as such should be encouraged, but no meaningful impact in terms of expanded funding should be expected in the short term from securitization. This technique will be restricted to new credits--once they have been "seasoned"--177because the existing portfolio of credit is neither sufficiently attractive in terms of yield, nor adequately documented. What can be expected in the short term from this initiative is better pricing of the new housing credits. Another likely outcome is that more cheap funds should be expected from this technique, for example, to fund Bank Maskan and its construction subsidiary. There is currently a proposal, however, to guarantee a rate of return to investor and to subsidize it in addition. If implemented, such a proposal would be a seriously distorting setback for the sound development of the housing finance system. Therefore, alternative ways to develop secondary mortgage markets, suitable for the current Iranian conditions, should be explored. 317. The Metrom project. The Ministry of Finance and the Economy has drafted an organic law for a new secondary facility finance company: The National Corporation for the Long-Term Sale of Residential Units of Iran," more conveniently known at present as Metrom. The new finance company would be chartered to purchase housing credits from the retail market and issue participatory papers backed by these credits to professional investors. By-laws would then follow. In terms of structure and governance, the CBI would license Metrom as a finance company with mixed public and private ownership. A recently proposed shareholder structure would include: · Foreign Investors: 30% of the shares · Private banks and corporations: 10% · Public banks 20% (with priority to Bank Maskan and National Bank Melli) · Public Insurance companies 20% · Social Security Organization 10% 177The word "seasoned" is a standard term in international mortgage finance. It refers to the fact that credit risks and other problems with a new retail financing tend to occur in the earlier life of a housing loan. After 24 to 36 months--or longer depending on the market--mortgage loans behave much more predictably. 119 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector · Gvt Employees Pension Fund 10% 318. It is planned that the National Land and Housing Organization would become a shareholder with up to a 20 percent share. Other shareholders would see their shareholdings reduced proportionately once the relevant approvals to the NLHO have been granted. The policy views of the government would be carried by MHUD through the NLHO votes. 319. As expected with endeavors of this importance and magnitude, there are many legal, financial, and regulatory issues that need to be worked out beyond this first step. In addition, a major pricing issue has arisen. The government should not directly subsidize the difference between the market price of these papers and the perceived "affordable" credit return needed to make long-term housing credits. The relevant section of the draft law should be reviewed and modified.178 Such a subsidy would start the project on the wrong footing and it would defeat the central purpose of the project, which is the mobilization of more voluntary savings on the domestic market. Market mechanisms can be expected to price properly the risk-adjusted portfolio profitability. There is no reason why higher income groups should capture most of the subsidies. One possible option to evaluate is the set of existing programs of interest rate subsidy, which may be continued and expanded if targeted properly and in an efficient manner, without mixing up the funding and credit sides of housing finance. 320. Iran has made good progress concerning participatory papers that were sold on the market. These were designed to finance projects of public interest with some government and/or bank guarantees. In order to benefit from the experienced already gained in this area, the structure of these deals may require several legal and financial adjustments in order to fit a pool of housing-credit receivables. These receivables consist mostly of share sale installments and/or leasing contracts with a growing equity participation; they are not associated to any given public project and they should not need any extra blanket guarantee. 321. The financial authorities may also want to explore alternative funding securities, including much simpler collateralized bonds and CDs. It is extremely difficult to provide more detail at this point on these alternatives, without fully knowing, first, their retail products, and, second, mortgage-related securities. An adequate understanding of the credit products offered by Bank Maskan (see Table 4-19) is necessary, as some of these products may be as complex as loan-linked deposits and include various risky embedded options. 322. Given the Iranian financial context described above, the government should avoid a rushed development of the Metrom project that would ignore important prior developments that the housing finance system so clearly requires--and that would in fact aims to bypass these needed development prerequisites with a reliance on government 178One draft version of the organic law for Metrom states: "if the commission fee rate of the purchased long-term sales contracts is less than the promised interest rate for participation papers, its difference balance which is included in the annual budget each year by the government will be paid to the corporation." 120 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector subsidies to investors. Because only new house loans would be funded this way, it is still possible to take some time to carefully review the proposals and evaluate alternatives. Moreover, the general financial infrastructure of the capital markets itself remains largely underdeveloped. In particular, there are no liquid benchmarks, no regulatory framework has been developed, and there is no professional supervisory body to monitor the system. The successful prior development of the infrastructure of the new partnership markets is a prerequisite for the development of secondary mortgage markets and as such it will be a key factor in facilitating more specific housing finance reforms in these markets. 323. In addition to the development of the infrastructure mentioned above, a considerable sequence of legal work remains to be carried out. Several important by-laws need to be prepared to insure a sound start-up phase in Iran. They include: (a) the bankruptcy-remote true sale of the credit pool, (b) independent custody function and standardized information disclosure for investors, (c) listing and trading conditions, (d) regulations about differentiated payment rights and credit enhancements compatible with Islamic finance, (d) CBI oversight capacities, and (e) possible indexation of the coupons. 324. In the current Iranian context -- and bearing in mind the required legal and financial infrastructure for the successful development of secondary mortgage markets -- it is strongly recommended that alternative ways to develop these markets should be explored. Due to the fact that there are ongoing discussions concerning the Metrom project, the sooner the suitability of these alternatives is explored the better. 3.4. Financing Social Housing Policy 325. Section 1 stressed that there are two distinct dimensions to housing affordability: the price of the housing unit to be purchased, and the financing cost of that purchase. Housing finance reforms need to be linked to a comprehensive housing policy strategy that will improve price affordability through a better use of land, more efficient construction technology, and sounder construction codes. The efficiency of the multiplicity of housing subsidies programs needs to be reviewed closely. 326. The fragmentation of social housing programs: Some remedies. An informal inventory done for the World Bank identifies some 29 separate programs. Most of these programs are operated vertically by different public institutions, like the Ministry of Housing, other Ministries, the Social Security Organization ("SSO"), the bonyads, state corporations, etc. The overall efficiency of these programs will improve when (a) objectives and instruments are better harmonized, (b) operating roles179 are more efficiently allocated, and (c) there are more incentives to leverage competition and private markets, notably to build housing units and to mobilize the capital for long-term finance. For example, the operations of the SSO--through a constructing subsidiary and its subsidized housing loans--may well be in direct conflict with its main fiduciary responsibilities, while benefiting yearly less than 0.1 percent of its members. 179Setting social housing priorities, allocating and monitoring various housing subsidies, funding credit capital and/or interest rate subsidies, providing banking services, acting as an institutional investor, conducting building, and developing activities through subsidiary companies. 121 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector · The government has implemented several programs of subsidized housing credit rates whose efficiency may be substantially improved. Some guiding principles should be: · Discounts on the profit rate in order to improve affordability are not needed over the full life of the credit given the long-term increase of nominal incomes according to inflation. · The Workers' Welfare Bank Refah operates social programs with public advances deposited yearly at the bank in order to co-finance loans to targeted social groups. Meanwhile, Bank Maskan relies on interest rate rebates to special groups. These social housing programs should be harmonized. · Interest rate rebates create adverse budgetary effects as subsidies accrue on a growing debt stock, leading gradually to an erosion of new beneficiaries. · The payment of interest subsidies through Bank Maskan wrongly requires that borrowers advance the full interests before being paid back the subsidy at year-end.180 327. More efficient subsidies can be designed. Those include: upfront equity vouchers for lower-income groups in association with the use of the housing saving funds; guarantee fund to cover additional credit risks; etc. The taxation of housing transactions, housing savings, and credits may also need further reforms. 328. The recent proposal made by the Ministry of Housing to create another social housing fund to refinance cheap credits, co-financed by the Ministry, the CBI, and the HB, should be examined within the full housing sector context. Similar instruments already exist such as the Ghadir Project in partnership with Bank Refah, and discounted loans with Bank Maskan. 329. The inflationary impact of greater demand: Central Bank concerns. The central bank considers the current situation housing shortage as inflationary through its impact on the inputted rent in the CPI index that keeps rising. The central bank is therefore reluctant to liberalize and expand housing credits if such a policy further increases housing demand without an adequate supply response. A thorough study of housing markets economics in Iran should help to better estimate such effects on the short and longer terms. Some of the issues are: · More thorough analysis should clarify the level of low elasticity of the housing supply, which appears to be city specific, and the institutional and regulatory causes. · Measuring inflation's impact requires a calculation different from the CPI. · The overall magnitude of housing loans will remain marginal for a while until reforms take hold. Better models of the housing finance sector would be useful to clarify the medium-term outlook. 180The efficiency is reduced as beneficiaries are assisted late during the construction phase and may end up also deferring their due bills to the constructor, before using the subsidy for non-housing purposes. 122 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 330. Should inflation rise again, the production of affordable housing loans may decline, but the housing demand, even if constrained, will remain strong because housing is an asset of refuge as an inflation-proof investment. Some households could still finance new housing from their equity savings. Presently, these private funds are not circulating through the financial intermediation system, where they would contribute to a more efficient and productive housing finance system. The policy issue is what kinds of rates of return on deposits would be needed to attract these private funds into the banking system, which goes back to the issue of designing appropriate deposit and savings instruments. 4. Conclusions 331. Continuing housing reforms are necessary if the housing finance system is to achieve a size, diversity and efficiency commensurate to the size of the economy and the scale of urban investment. Housing finance reforms, however, are dependent on the overall speed of financial liberalization. Given that context, a suitable ranking of policy priorities is: · An in-depth, modern evaluation of the risks embedded in the dominant reliance on the "housing savings funds for housing" to fund the housing system, desirable design changes in these instruments and the development of related risk management techniques. These savings instruments should be made available to all banks. · A comprehensive review of the numerous subsidized lending programs and the development of a consistent framework for their coordination and better targeting in order to maximize the benefits of the public resources devoted to these programs. · The development of "inflation-resistant" housing finance instruments for saving mobilization and funding of housing purchases. · Improvements in the regulation and supervision of Bank Maskan as well as its internal modernization in order to facilitate this specialized bank's evolution from its present status as an administrator of public programs to a modern bank with low operating costs better able to manage risks and mobilize funds. · Worldwide trends show that housing finance can make a substantial contribution to development of fixed-income securities markets in Iran. Given that the capital markets of Iran are still at a very early stage of development, great care needs to be taken that the proposed development of a "secondary mortgage market" and the development of secured funding instruments will be properly sequenced and will focus on the development of the required legal, regulatory and market infrastructure in close coordination with other capital market development efforts. The successful prior development of the infrastructure of the new partnership markets is a prerequisite for the development of secondary mortgage markets. International evidence suggests that attempts to artificially speed up the development of capital markets in order to expand funding to the housing sector by relying on state provided subsidies to investors are not likely to be sustainable market development in the medium and long term. Such distorting tactics could in fact lead to a slow-down in 123 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector the development of that segment of the domestic capital markets, as other segments of the capital markets develop. 124 5 The Construction Sector 1. Introduction 332. The construction sector plays a significant role in the Iranian economy. It employs more than 11 percent of the working population in the country, and about 40 percent of those aged 15 to 29 years, simultaneously meeting the demand for housing while addressing a serious problem of unemployment (13.8 percent by the end of 2001), particularly among the young and the unskilled. Over the past decade, about 40 percent of total annual investment was in this sector, where it generated more than 8 percent of GDP. 333. The construction industry has several important characteristics, particularly with regard to housing. First, it is highly competitive; private-sector developers dominate the industry, which is chock-full of firms, developers, and specialist service companies. Second, construction sector laws and regulations permit entry into the field. Third, the sector has a ready supply of unskilled labor. Finally, primary construction materials are readily available; if managed properly, there is even enough export capacity. Notwithstanding these positive features, Iran has several issues to address--particularly the special treatment of public and semi-public construction companies, and public sector control over the production and pricing of construction material industry. Indeed, building patterns and construction modes in Iran are shifting away from one-story masonry buildings to multi-story structures. Although this shift is increasing the demand for steel and cement, recent government policies have started to eliminate energy subsidies threatening the energy-intensive production of these materials. 334. This chapter describes the conditions and trends in Iran's construction industry and assesses its ability to cope with the increasing demand for housing. Analyses focus on how the industry is organized and the institutional and regulatory framework in which the various players operate, as follows: · Organization. The construction industry in Iran is marked by the major role played by the private sector in construction and the strong government role in production, pricing, and importing of several essential materials such as steel and cement. · Institutional and regulatory framework. Industry practices are regulated in a framework that governs the production and the import/export of building materials. Regulations and institutional practices also affect technology and resources and influence the business environment. Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 2. Industry Organization 2.1. Who Builds? 335. The private sector has a major role in Iran's residential construction. Building permits issued between 1996 and 2000 show that by the private sector built 86 percent of new housing in Iran; cooperatives and the public sector built 11 percent and 3 percent respectively (see Table A5-19 in Annexes ­ Chapter 5). Expenditures in 1375 (1996­97) show that the private sector has built 65 percent of urban projects, amounting to 83 percent of total expenditures. About 90 percent of annual private sector expenditure on urban construction is in housing (see Table A5-17). Additions and renovations comprise a fifth of urban projects, accounting for 22 percent of the private sector expenditure on urban areas. 336. In spring 2001 private sector investment in construction amounted to IRR8,510 billion. More than half (56.2 percent) was in Tehran, Khorassan, and Isfahan provinces, 40.7 percent of which was in Tehran province alone. Over the past five years (1995- 1999) the city of Tehran has attracted an average of 35 percent of all private sector investments in urban housing. Although this investment has grown at an average of 28 percent per annum over the same period, this growth rate is lower than the national average (i.e. 35 percent). Recently, other urban areas have started to attract more private sector housing investments and as a result show a higher average annual growth rates (39 percent). 337. Traditionally, housing cooperatives have been the second most important players in housing construction in Iran, but their share has been decreasing. Building permits records show that the percentage of total dwellings built by cooperatives decreased from 14 percent in 1997 to 7 percent in 2000 (see Table A5-19). In 2000, there were 9,044 registered housing cooperatives with 1.7 million members and a capital of over IRR478 billion. Nevertheless, 40 percent of these cooperatives were in-active. The majority (66 percent) of active cooperatives is based in six provinces, and one third of them are in Tehran (see Table A5-20). 338. The public sector has a surprisingly small share of housing construction. The average share of government in housing construction between 1996 and 2000 was 3 percent; several Ministry of Housing and Urban Development schemes initiated during that period caused this share to rise to 5 percent. 2.2. How Is It Built? Building Patterns 339. One- story masonry detached houses have long been the prevailing structure in Iran; they still constitute a significant portion of national housing production. 1996 census data show that 83 percent of houses are masonry, while nearly half of these (45 percent) are built with brick walls covered by steel beams featuring brick jack arch roofs181. The 181Other types of masonry structures include brick walls with timber roofs (14 percent), adobe walls with timber roofs (10 percent), concrete block walls (6 percent), and adobe walls with adobe vaults (5 percent). 126 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector pattern is gradually shifting, however, in favor of multi-story steel structures, particularly in Tehran. This change results in a constant increase in use of steel and cement in residential construction (see figure 5-1).182 As shown by the census data, between 1986 and 1996 the share of steel and concrete frame structures in the housing stock increased by 334 percent throughout the country, and the share of adobe structures decreased183. Figure 5-1. Dwellings by type of structure, 1986 and 1996 6000000 5000000 4000000 3000000 2000000 1000000 0 n/a frame timber adobe misc frame steel frame orstone &timber block &stone &timber concrete &concrete &brick brick concrete brick adobe steel steel 1986 1996 340. Even in rural areas less and less housing stock is constructed of timber (a 42 percent decline), adobe walls with timber roofs (a 32 drop), and adobe walls with adobe vaults (a 40 decrease), while more and more buildings are built with brick walls covered by steel beams and brick jack arch roofs (77 percent). There has been a 36 percent increase in building with brick walls and timber roofs (36 percent), and a 62 percent rise in concrete block buildings (see Table A5-1). Nevertheless, the share of framed structures in total housing stock is not as significant as masonry structures (see Table A5-2). Changing construction techniques and material are being driven by new building code requirements 182There are not many differences between urban and rural housing in terms of type of structures. According to the same data, in 1996 masonry buildings prevailed in both urban (77 percent) and rural (94 percent) areas. In urban areas more than half of the housing stock (56 percent) was built with brick walls roofed by steel beams and brick jack arch roofs, while the share of steel and concrete frame structures was also significant (16 and 5 percent respectively). The overall share of framed structures (21 percent) was considerably higher as compared to rural areas (3 percent). The prevailing masonry types in rural areas were brick walls roofed by steel beams and brick jack arch roofs (26 percent), brick walls with timber roofs (24 percent), adobe walls with timber roofs (22 percent), concrete block walls (9 percent) and adobe walls with adobe vaults (9 percent). 183In the urban areas the 304 percent increase in steel and concrete frame structures goes along with a marked reduction in masonry structures, especially in adobe walls with timber roofs (47 percent reduction), adobe walls with adobe vaults (42 percent reduction) and brick walls with timber roofs (34 percent reduction), and to a lesser extent brick walls covered by steel beams and brick jack arch roofs (13 percent reduction). 127 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector and the trend toward multi-story buildings. In addition, with changing patterns in building construction, cement and steel consumption will continue to increase. 341. Despite this substantial increase in the durability of housing structures, much of Iran's housing stock is still vulnerable. According to data from the Housing Foundation, in the period between1993 and 2001, more than 599,500 dwellings were damaged by natural disasters. About a quarter (24 percent) of these homes were considered reparable, meaning they sustained damages of less than 30 percent, making them eligible for repair. 342. In most Iranian cities the municipality can control neither the working drawings nor the quality of construction. Given the fact that more than half of registered engineers in the country are based in Tehran, the final construction quality actually depends on the know-how of small-scale contractors and builders. As shown by the damages incurred in the recent earthquakes, introduction of new materials without the necessary construction know-how has adversely affected the safety of built structures. Lack of knowledge on reinforced concrete construction and other safety recommendations of the national seismic code for example, have been found to be a major cause of structural failure in the 1998 Qa'en earthquake. 343. Most buildings in Iran are one or two story buildings. With the exception of Tehran, multi-story construction throughout the country has not been common. A countrywide survey shows that 85 percent of permits issued in 1998 (excluding the city of Tehran) were for one- and two-story buildings; three-story buildings accounted for 12 percent of the permits issued. Only 1 percent of the permits were for buildings with more than five floors. By way of contrast, almost every permit issued in Tehran in 1998 and 1999 was for buildings with 3 or more floors. For all cities, the share of buildings with three or more stories has risen from 15 percent to 23 percent. Similarly, the number of dwellings per building has increased over the past few years: between 1998 and 2000 the percentage of buildings with 5 dwellings and more increased at an annual rate of 1 percent. A third of the permits issued for buildings with five dwellings and more were in Tehran province,184 followed by Isfahan, with a share of 11 percent. 2.3. Production and Consumption of Materials 344. The construction industry in Iran is marked by a strong government role in production, pricing, and importing of several essential materials such as steel and cement. The consumption of structural steel in construction of new residential units during the Third Five-Year Development Plan (2000­2004) is projected as 10.7 and 3.5 million tons for urban and rural areas, respectively.185 This adds up to 14.2 million tons of reinforcement bars, steel profiles, and corrugated sheets. 184The data excludes the city of Tehran. The city of Tehran is where there is the highest share of multiple dwelling permits, as in the same year only 22 percent of the permits were issued for buildings with 4 dwellings and less, while 49 percent of the permits were for buildings with 9 dwellings and more. 185See: Behrooz Sohrab Veyseh; Masoud Ghasemzadeh; and Nahid Khodabandeh Kouranloo; "Estimation of the Construction Materials Requirements in the Third Economic, Social and Cultural Development Plan." BHE, no.28, pp.11­29. (Some assumptions in this estimation should be cautiously accepted, namely the distribution of building 128 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 345. Steel. Steel is produced by the public sector companies and regulated by the Ministry of Industries and Mining. From April to July 2002, according to National Steel Company, the production of reinforcement bars increased 69 percent; while hot-rolled steel sheets increased by 32 percent. The mean increase for steel products in the same period was 26 percent, corresponding to 2.486 million tons. Several initiatives are in place to increase national steel production. Total production of steel in 2002, around 7 million tons, is behind the projected consumption amount of around 10 million tons.186 346. Importing steel however, is not always determined by actual demand. This is partly because the import of steel by the private sector, under the supervision of the Chamber of Commerce, does not take into account steel production by the public companies. In 2001, for example, Iran imported around 4.3 million tons of steel--at least 1.9 million in excess of national demand. That same year, Iran exported steel products to Europe and other countries. According to International Iron and Steel Institute, Iran ranked 19 worldwide, with 3.9 million tons of total imports in 2001, while in terms of net imports it was ranked 8. 347. Domestic steel prices are government-controlled in Iran. In 2002, the average FOB price for steel products was determined as IRR1,950 (US$244) per ton--i.e., about 89 percent of the actual finished price. With international steel price constantly rising, government controls are likely to become a problem. The price of reinforcement bars, for example, increased 35 percent the first six months of 2002 while the domestic price remained fixed. Nevertheless, steel imported from central Asia is considerably less than the national and international prices. These conditions make the import of steel very profitable since domestic price is fixed. Nevertheless, in early 2001 the Parliament approved IRR350 per kg tax (US$44 per ton) on all steel imports, which affects the price of finished products. The government also sets ceilings on the amount of steel imports and sets taxes. 348. The challenge for the government is relieving the limitations on steel imports while supporting domestic production. One alternative would be to encourage the private sector to import ingots, billets, and blooms instead of finished products so as to promote domestic production as well. This is obviously contrary to the inclination of the private investor who prefers the finished product. Efforts to increase the domestic production are also under way. 349. Cement. Demand for cement is on the rise and efforts are being made to increase production. Nine new cement plants are currently under construction with an additional production capacity of 5.3 million tons. Projections of cement consumption owing to the increase in residential construction set the figure at more than 44 million tons under the Third Five-Year Development Plan (2000­004), 32.5 million tons for urban areas and typologies and the quantity of planned construction versus real urban and rural construction, and the choice of different steel products in particular buildings.) 186The estimations are based on projections of 9.5 and 10.5 million tons by Ministry of Industries and Mining and Ministry of Commerce, respectively. 129 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 11.4 million tons for rural projects.187 Average residential consumption is 9 million tons per annum. Consumption derived from new residential building construction is estimated at 37 percent of 24 million tons of total domestic consumption in all sectors for 2001. 350. Total domestic consumption has increased 12.8 percent in 2001, which is somewhat more than the rate of growth in domestic production. The Ministry of Industry and Mining forecasts an annual increase of 2 million tons in cement production to meet the projected increase in demand of 70 million tons by 2021. The average rate of growth between 1995 and 1999 has been around 10 percent. Currently Iran has 34 cement plants in operation. In 2001 they produced about 26.650 million tons of cement, about 5 percent of which was exported. In the first four months of 1381 (April to July 2002) 433,000 tons of cement were exported to Spain, Italy, Saudi Arabia, Kuwait, the UK, Afghanistan, North Iraq, Turkmenistan, Azerbaijan, and the Gulf States. The production in the year 2002 is projected to be 28.3 million tons; about 1.3 million tons, again, 5 percent, will be exported. 351. Public and semi-public organizations own the greatest numbers of shares of Iran's cement plants. Nevertheless, according to the Privatization Organization, sale of cement plant shares on the stock exchange has greatly reduced the shares of public organizations. Semi-public organizations, such as Bonyad Mostazafan, are still significant actors in the market. Insurance companies have recently bought large shares of cement and ceramic industries. 352. Iran is seeking to increase the private sector's share by providing financial and foreign currency incentives for investors. The steering committee for the Foreign Currency Reserve Fund offers short-term loans in foreign currency to investors who wish to invest in nongovernmental cement production. Some foreign investments have been made in the new Ardebil cement plant, but the industry's depreciation rates and initial investment costs make this difficult. Cement prices are still determined by the Ministry of Industries and Mining, although this may be easing some. Rising demand for cement and steel on the one hand, and on the other the very strong public sector control, leads us to think that cement shortages are in store for Iran. 353. Other Materials. There are no apparent shortages in other construction materials. Production of tiles and ceramics, for example, has constantly grown at an average rate of 10 percent between 1995 and 1999, when the total production was about 64.1 million square meters. For the Third Five-Year Development Plan period (2000­2004), projected production capacity is 200 percent of 184.74 million sq. m. of estimated consumption.188 Similarly, glass production responds to demand very well, in 2001 390,000 tons of glass panes were produced, 14 percent of which was exported. There are plans to add two new factories, which will add an additional production capacity of 240,000 tons per annum. 187See: Behrooz Sohrab Veyseh; Masoud Ghasemzadeh; and Nahid Khodabandeh Kouranloo; "Estimation of the Construction Materials Requirements in the Third Economic, Social and Cultural Development Plan." BHE, no.28, pp.11­29. 188The consumption estimation is by Behrooz Sohrab Veyseh; et al. For production capacity see Table A5-6. 130 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 354. Even if Iran suffers no significant shortages in construction materials, construction costs are expected to rise because of the recent elimination of energy subsidies. A tenfold increase in tar prices was registered in early 2002 as some petroleum subsidies were abolished. Tar is Iran's primary bituminous material, so this has affected the building costs to some degree. If the trend continues, energy-intensive building materials, especially steel and cement, may see sizable price increases. The price of steel products, for example, has increased 12 to 14 percent in early 2002. Such price hikes may affect the choice of building materials and technologies. 355. Machinery and Equipment. Although production of machinery and trucks grew by 18 percent between 1996 and 1999, over the past few years the production of heavy construction machinery has fallen by 14 percent; production of trucks has decreased by 28 percent) (see Table A5-7 for further details). In addition, the vintage of construction equipment is very old and much of the machinery in use is practically worn out. Therefore, the construction-machinery industry needs to be reorganized if it is to meet the increasing demand and to cope with the needs of the private sector. 356. Although Iran has a number of small-scale equipment leasing companies concerned mostly with excavation jobs, the country has only a few large-scale equipment-leasing companies--namely, Jihad Nasr and the Machinery Bank. The former is a major holding company for some 28 provincial companies, which are also active contractors for public and private projects. The latter is affiliated to the Housing Foundation and provides services both to the foundation and its affiliated organizations, as well as leasing equipment on the market. It is based in Tehran with a number of provincial branches that also work as contractors. Capacity in this area needs to be improved significantly to facilitate the better functioning of construction industry. Support, including credit facilities, is needed for the private leasing industry. 2.4. Building Codes 357. In spite of the fact that the Ministry of Housing and Urban Development was mandated to develop the Iranian National Building Code in 1977 and despite a number of sporadic efforts by academia and individual researchers, the serious attempt to develop a comprehensive code for Iran did not start until 1987, when the Ministry set up a Technical Committee and 21 working groups, each responsible for developing a particular chapter of the Code189. While some chapters such as steel and concrete 189The Iranian Building Code is developed according to articles 13 of the Law for Reforms in Architecture and Building Systems (1977). Article 14 obligates the municipalities to follow the code, while article 15 underlines the right for legal pursuit of non-compliance cases. The Board of Ministers adopts all chapters of the code. The code is further mentioned and enforced in Engineering Disciplinary and Building Control Law (1995), whereby the municipalities under the jurisdiction of the law are required to accept only the working drawings of licensed engineers who are by the same law made responsible for compliance of their design to the National Building Code. The law also requires that all urban areas should be included within its jurisdiction within a period of 10 years. Article 33 mentions also the possibility of adapting the code to provincial conditions and the necessity of revising the code every three years. 131 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector structures have been adopted for more than a decade190, at the time of writing, the part covering most of Iranian construction (masonry structures) has been only recently developed191. The building regulations in Iran implicitly favor steel and concrete structures. Thus modern energy-intensive materials are promoted both in formal urban and rural construction. 358. Nevertheless the implementation of the code requirements demands higher technical capacity, which is not currently available in most parts of Iran. The municipality supervision also lacks the capacity to perform any effective form of quality control. This has led to an increased use of energy-intensive expensive materials for building vulnerable structures suffering from poor workmanship. Lack of knowledge on reinforced concrete construction for example, has been found to be a major cause of structural failure in the past earthquakes. 2.5. Technical and Human Resources 359. The construction sector's technical capacity is well developed. Iran has a good supply of engineers, consulting firms, and large-scale contractors able to take on international projects in addition to small-scale builders.192 Thus, the number of construction firms, developers, consultants, and service companies is sufficient to form the basis for a competitive sector. 360. The housing construction sector has a capacity for generating significant employment opportunities for unskilled labor owing to the use of traditional construction methods. The sector employs 11.3 percent of the working population in the country, and about 40 percent of those so employed are 15 to 29 years old. Therefore meeting the demand for housing also addresses Iran's current unemployment problem, particularly for the young and the unskilled. Iran's working seasons vary by region, meaning there is a constant supply of employment opportunities for seasonal and informal workers willing to follow the work. This is an important property for a country facing serious unemployment problems--around 11.3 percent in 2001, projected to reach 16.5 percent in 2002, and likely to rise in the coming years. 190Owing to its urgent nature, the Iranian Code for Seismic Resistant Design of Buildings was adopted separately as the Standard 2800. The code has been revised once since its adoption in February 1988. It covers loading methods for steel and concrete structures and provisions for non-reinforced masonry structures. 191 The following parts explain the structural requirements: Building materials and products (part 5); Loading conditions (part6); Foundations (part7); Masonry Construction (part8); Concrete structures (part9); and Steel structures (part10). Other aspects covered by the code include: Fire protection (part 3); Safety during construction (part12); Electric installations (part13); HVAC installations (part14); Lifts and escalators (part15); Sanitary equipment (part16); Acoustical requirements (part18); and Energy conservation (part19). At the time of writing only two parts remain to be developed: the part on architecture (part2) and the one on signage (part1). 192In 2000, there were about 44, 000 registered construction engineers throughout 28 provinces of Iran. Most of the engineers are civil engineers (68 percent) and architects (14 percent). However, 83 percent of them were concentrated in Tehran and seven other urbanized provinces. Tehran itself houses 51 percent of construction engineers. Compared with the number of building permits issued in the same year, the mean number of permits issued throughout Iran per registered engineers is 3.4, while the ratio is 2.4 and 4.4 for Tehran and seven other provinces, respectively. In some provinces (e.g., Bushehr and Lorestan) the ratio increases to about 20 permits per registered construction engineers. 132 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector 361. The government plans for the construction sector to play a substantial role in generating employment. The housing sector's share in total employment was set at 25 percent in the current Five-Year Development Plan, while the actual share was around 28 percent in 2001 and 2002 (see Table A5-9). Nevertheless, the increase in equipment- intensive structures will reduce the sector's need especially for unskilled labor. Between 3.7 and 4.2 man-day jobs are generated by one square meter of construction. Masonry structures require more than twice the unskilled labor needed for steel or concrete structures (see Table A5-10). The share of steel structures and brick masonry in employment generation are 13 percent and 81 percent, respectively.193 This justifies a serious attention to training programs. Developing the capacity can also help to increase employment opportunities outside the country--e.g., in the Gulf States and Afghanistan194. 362. The Technical Vocational Training Organization (operating under the Ministry of Labor) has a system of continuing education and training in place. It has the authority to issue professional certificates in coordination with the Ministry of Housing and Urban Development. The Organization is represented throughout the country by about 200 training centers and implements its activities through partnership with some 5,000 private sector training institutions. Although it has quite an extensive network, its capacity has not been used to address the needs of the market. A number of professional associations mediate between the government and the private sector--including the Syndicate of Construction Companies, the Society of Consultants, and the Developers Professional Association. 3. Institutional and Regulatory Framework 363. Sector institutions and decision-making in urban and housing development are quite centralized in Iran. According to the 1974 law, the Ministry of Housing and Urban Development is responsible for overall policy-making and monitoring of the housing sector as well as for planning at national, local, and city levels. Planning activities are under the supervision of the vice minister for urban development, who also acts as the secretariat for the High Council of Architecture and Urban Development. Following the 1972 law that established the High Council of Architecture and Urban Development, two 193Gholamali Farjadi and Hassan Safari, Project on Employment in the Housing Sector, Institute for Research in Planning and Development, Management and Planning Organization, Tehran 1997. See also Table A5-11. Some assumptions in this estimate should be treated with caution, regarding the assumed vs. actual construction patterns. Also compare their results with the Table A5-9. 194The employment opportunities and daily wages for labor might also be affected by the return of Afghan refugees. According to the Ministry of Interior there are currently 2.650 million migrants in Iran, of which 2.330 million are Afghans, 0.202 million are Iraqi, and 5 thousands come from Pakistan and Bangladesh. According to UNHCR, the number of Afghan refugees who have voluntarily returned to their country since April until September 2002 is 214,587 people--i.e., only 9 percent of Afghanistan's migrant population. The plan is to continue encouraging the return of Afghan refugees, although presently there is a flow of illegal migration from Afghanistan to Iran. The situation might change if the reconstruction of Afghanistan starts. However, there has been an increase in construction labor wages in 2002. The total wages index of construction workers in May 2002 has increased 13.3 percent as compared to May 2001. Compared with April 2002, the wages index in May has increased 2.1 percent and 2.3 percent for skilled and nonskilled labor respectively. The mean value of total construction labor index in May and April 2002 also shows 12.4 percent increase as compared with the previous year. 133 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector vice presidents and eight ministers are Council members. The municipalities are obliged to comply with the decisions of the Council. Although some of them are relaxed195 in accordance with local capacities, little delegation of powers to them has taken place. 364. The centralized and supply-driven provision of production factors (primarily land and construction material) hampers private sector operations (see Chapter 2). Furthermore, the regulatory framework provides public and semi public construction companies with several privileges that are not available to private sector companies although they are the main actors in construction. The ministry therefore established the New Towns Development Company in an effort to address the housing needs created by an overflowing urban population. The company acts as a holding for a number of subsidiary companies, each responsible for developing a particular new town. The companies acquire land and develop residential housing in their respective towns. In cities, National Land and Housing Organization (NLHO) is the executing body for land and housing under the ministry; since its inception in 1979, the NLHO has been the major owner and supplier of urban land. It owns a great deal of land in more than two hundred of Iran's larger cities. About 51 percent of NLHO projects were built by subcontracting; 38 percent were constructed through joint ventures--NLHO and a private company--and 11 percent were built by selling the land to private developers.196 The main contractors for NLHO have been quasi-public companies such as Sazman Tose-e Maskan Iran Company and Ekbatan Company (both affiliated to Housing Foundation) and Housing Investment Company (affiliated to Bank Maskan). The provision of land to different groups has undergone sporadic change (figure 5-2),197 but most of these were not related to demand (also see Table A5-23). 195 In Tehran, for example, two sets of drawings have to be submitted in order to obtain a building permit. A registered architect should sign the architectural drawings, while a registered civil engineer should sign the structural drawings and calculation sheets. There are fixed limits on the number and size of projects for professionals according to their ranking. In Tehran the owner is also required to hire a third engineer for construction supervision. Many of the regulations are not applied at length in smaller cities. For example, no distinctions between civil engineers and architects are made for signing architectural drawings and structural calculations. In many cities no drawings are submitted at all. Furthermore, the Third Five-Year Development Plan approved in December 2000 by the Board of Ministers mandates a number of ministries and public agencies to pursue reforms in housing sector during the Plan. One of these is to review and simplify the procedures for issuing building permits under the supervision of city councils. For further details, see Table A5-8 196See also Table A5-21 for the distribution of projects according to type of contract. 197Land allocation in the first decade of its operation focused more on supply of land to individuals and later to cooperatives, so that from 1979 to 1988 about 86 percent of dwellings built on NHLO allocated land was by individuals (55 percent) and cooperatives (31 percent). During the First Five-Year Development Plan (1989­1993) more emphasis was on developers and the share of their land increased from 14 to 37 percent, while the share of individuals and cooperatives decreased to 42 percent and 21 percent, respectively. Under the Second Plan (1994­2000) the share of cooperatives and developers reduced to 18 percent and 26 percent respectively, while the share of individual land allocation increased to 55 percent (see figure 5-2). 134 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Figure 5-2. NLHO Land Allocation to Diverse Actors 60% 50% 40% 30% 20% 10% 0% 1979 -1988 1989-1993 1994-2 0 0 0 Years individuals cooperatives developers 365. Construction companies need to be graded by the Management and Planning Organization according to their personnel and resources in order to be eligible for public contracts (see Figure 5-3). Points are awarded with reference to machinery, equipment and tools at the possession of the company, as well as managerial qualifications, working experience and financial status (see Table A5-16). There is a national grading and a provincial grading, for which two separate lists are published.198 Public organizations fall mostly in higher-grade scales. The dominating presence of public and semi-public companies in the higher grades is explained by the high costs of obtaining equipment.199 198The number of contractors in lower grades is naturally higher, but in buildings category there is a disproportionate concentration of contractors in grades 1 and 2, as 80 percent of some 8,438 of national and provincial contractors are in grades 1 and 2, while only 8 percent are graded 4 to 8. The number of contractors in grade 8 is merely 1 percent. Not only there is a disproportionate distribution of contractors in national grading, but also there is an uneven distribution of lower grade contractors throughout the country as well. In September 2001 for example 59 percent of provincial contractors were based in only 8 provinces, while 41 percent were distributed throughout 22 other provinces. 199The grading for 31 contracting companies affiliated to the Ministry of Agricultural Jihad for example is 3 to 8 in road-building category, while many of these are highly graded in specialized categories such as High-tech Concrete Structures, Dams, Tunnels, Irrigation, etc. Other prominent grade 8 contractors in Buildings category belong to the armed forces (Sepah, air force, and police), bonyads, ministries, and the banks. It is not possible to determine the exact percentage of quasi-public graded companies, but their prominent presence in the higher grades is evident in The List of Building and Installations Contractors: National (not Provincial) Contractors Eligible for Invitation to Bidding and Contracting, Deputy for Technical Affairs, Management and Planning Organization, Tehran: 2001. 135 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Figure 5-3. Graded Contractors by Management and Planning Organization 8 1% 7 1% 6 3% 5 3% Grade 4 6% 3 7% 2 26% 1 54% 0% 10% 20% 30% 40% 50% 60% 366. Public or semi-public contractors enjoy a number of advantages unavailable to private sector companies. They enjoy greater flexibility with regard to evaluation, securities requirements, and technical supervision. They have ready access to bank credit. The armed forces can recruit young engineers at very low wages for compulsory military service. Some bonyads (the Housing Foundation, for example) do not have to comply with the Labor Law and are exempt from arbitration costs. Until recently, many bonyads enjoyed various tax exemptions. There are no minimum profit margins for public and semi-public organizations. 367. In early 2003, the Management and Planning Organization announced the Government approval of a revised version of regulations for grading contractors and contracting procedures. The revised version introduces new concepts such as annual selection of successful contractors. The most important concept however, is the two-stage bidding in which a short list is developed out of eligible bidders in an open bidding. The final selection is based on a technical evaluation200. 368. Although there are various penalties for delays in public contract provisions, they are rarely applied if a public organization suffers delays. In many cases, full payment is rendered with delays of as great as a year. There is no compensation or price adjustment for these delays; therefore private contractors prefer to accept fewer public contracts than allowed by their ceiling, while public or semi-public companies rely on the financial support of the holding company that keeps them from bankruptcy. 369. Public housing schemes, however, are dominated by lower-grade and individual contractors, most public sector contractors are not interested in small-scale, labor- intensive projects because they are not profitable. Nevertheless, according to 200The Cabinet approved the revised regulations in October 2002 on the basis of the MPO proposal of August 2000. 136 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector Management and Planning Organization regulations, minimum and maximum commissions are calculated merely on the basis of costs--irrespective of technical complexity. Any government-initiated large-scale residential project can be contracted only to higher-grade contractors (see Table A5-16 for details on minimum and maximum contracting limits)201. Evidently, higher-grade contractors subcontract the project to lower-grade companies and individual contractors, which increases overhead costs to no particular advantage. 370. Provision of serviced land for housing is subject to various regulations which have contradictory objectives. For example, the law adopted by the parliament (Majlis) prohibits land subdivisions for residential purposes without first determining residential land use. This would adversely affect the supply of urban land and thus the production of new housing. By way of contrast, the government has instituted several subsidies to encourage housing production. 371. There are tax exemptions202 and finance subsidies planned for developers to encourage the production of mass-housing. Subsidized loans are offered to developers who build more than three dwellings in rural areas, more than five dwellings in small cities (under 250,000 population), and more than ten dwellings in bigger cities. Further, interest rate subsidies are extended to developers who use new technologies, build energy-efficient buildings, and construct rental units. For each item there is a 4 percent discount on the interest rate, amounting to a maximum of 12 percent. They can lead to increases in housing production, if construction material industry's capacity is upgraded and developers have good access to serviced land. 372. Municipality regulations for obtaining building permits need to be simplified for production of mass-housing projects203. Also, utility connections should be speed up considerably. 373. The Third Five-Year Plan hopes to improve the economic environment for the construction sector with the following changes: (i) Ministry of Interior and municipalities have been mandated to review and simplify the procedures for issuing building permits 201In particular, article 8 of Regulations for Qualification of Building and Installations Contractors and Contracting (Deputy for Technical Affairs, Management and Planning Organization, Tehran: 2001) emphasizes that the amount and number of contracts should be according to the maximum and minimum limits of a corresponding grade. The decision to award contracts to higher or lower grade contractors can only be made by the Office for Contractors' Affairs at Management and Planning Organization. 202The first transaction of newly built premises which are not older than two years as shown by the certificate of completion are subject to a developers tax (10 percent of purchased value of the building) and a transactions tax (5 percent of the value of land and building). Nevertheless, according to amendments to Direct Taxation Law in the period 2000-2004 the developers who build according to the Housing Consumption Pattern and build more than three dwellings in rural areas, more than five dwellings in small cities (under 250,000 population), and more than ten dwellings in bigger cities are exempted from transaction taxes. This means that in cities such as Tehran, Mash-had, Tabriz, Isfahan, and Shiraz the built area should be less than 75 square meters, while for other cities the maximum built area should be less than 100 square meters. 203For example despite the replication of design in a mass-housing project several architects have to be hired. In Tehran, projects of more than 2,000 square meters, a consulting firm has to approve the drawings prepared and signed by respective engineers, regardless of the technical complexity of the project. For developments on plots of land over 6,000 square meters, the master plan has to be approved by the commission monitoring the implementation of the city master plan (commission article 5). 137 Iran--Strategies for the Housing Sector Chapter 5: The Construction Sector under the supervision of city councils; (ii) Ministry of Economy and Finance should provide the regulatory framework to promote insurance for securitizing housing investment; (iii) Ministry of Housing and Urban Development has been mandated to support the formation of professional associations, while qualifying and grading developers; and (iv) Ministry of Housing and Urban Development is also required to promote cost-effective, energy-efficient, environment-friendly housing typologies and reduce the use of hazardous materials; make provisions for increasing effective life and durability of building stock; complete the remaining parts of Iranian National Building Code; and develop a national standard for building materials. 4. Recommendations 374. The main recommendations for developing Iran's real estate and construction sectors are as follow: · Sever the links between Government and financial institutions and construction companies: (i) the Government should relinquish ownership and control over construction companies; and (ii) banks should consider selling their equity interests in construction companies to the core private investors and to the public via listing on the Teheran Stock Exchange. · Develop the private sector's role in the construction sector and reduce the relative dominance of quasi-public companies by: (i) revising the regulations favoring quasi- public companies, especially with regard to government contracts and contractor grading; (ii) revising the municipality regulations for issuing building permits to encourage multiple-housing projects, with special discounts/ privileges for low- income housing; (iii) increasing the supply of land by removing the blockages in the regulatory system; (iv) improving insurance coverage for construction companies. More affordable liability insurance products, and more flexible conditions, to support the development of small companies with limited resources; (v) allowing and encouraging banks to finance government receivables; (vi) developing a framework for attracting private investors in housing project ventures; (vii) liberalizing the equipment leasing industry and improving timely and adequate access to credit; and (viii) upgrading worker skills through training and accreditation programs supported by the professional associations. · Revise and simplify building codes and regulations to balance safety requirements with demand for housing and Iran's available pool of skills and materials. This could encourage investment in the technology for low-cost and energy-efficient housing. The following options are recommended: (i) revising building codes and standards in publicly funded housing projects in order to allow for substitution of energy-efficient materials and appropriate technology techniques; (ii) promoting substitution of energy-efficient materials in place of steel and cement without compromising safety; and (iii) noncompulsory standardization of building components. 138 Iran- Strategies for the Housing Sector Annexes ­ Chapter 1 ANNEXES - CHAPTER 1 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Annex 1.1. Trend of Selected Price Indices, 1979­2001 Year Consumer price Housing General Housing US$ exchange US$ ex. rate Stock market Stock market index (PI) price index inflation rate inflation rate rate increase (percent) index growth (percent) 1979/0 55.3 75.9 11.3 ­5.5 138 8.6 --- --- 1980/1 68.3 81.4 23.6 7.2 150 8.6 --- --- 1981/2 83.8 89.2 23 9.5 250 66 --- --- 1982/3 100 100 19.2 12.1 350 40 --- --- 1983/4 114.8 126.6 14.8 24.6 550 57 --- --- 1984/5 126.7 126.8 10.4 1.7 613 11.4 --- --- 1985/6 135.4 137 6.9 8 741 21 --- --- 1986/7 167.5 163.8 23.7 19.5 990 33 --- --- 1987/8 213.9 201.9 27.7 26.2 1,018 2.8 --- --- 1988/9 275.7 258.7 28.9 25.2 1,211 18.9 --- --- 1989/0 323.8 304.4 17.4 17.6 1,410 16 --- --- 1990/1 352.8 327.6 9 7.6 1,419 0.6 100 --- 1991/2 421.9 390.8 20.7 19.2 1,498 5.5 472 472 1992/3 513.2 475.6 24.3 21.6 1,810 21 435 ­8 1993/4 650 578.9 22.9 21.6 2,808 55 403 ­8 1994/5 879.8 683.4 35.2 18 4,064 44 694 72 1995/6 1,314 875.4 49.4 28 4,446 9.3 1,549 120 1996/7 1,620 1,179 23 35 4,781 7.5 1,936 25 1997/8 1,898 1,529.4 17 29.7 6,468 35 1,653 ­15 1998/9 2,244 1,818.5 18 18.9 7,146 10 1,537 ­8 1999/0 2,701 2,162 20.3 18.9 8,420 17.8 1,690 9 2000/1 3,025 2,680 12 24 8,180 ­3 N/A N/A Source: Central Bank of Islamic Republic of Iran, Economic Report and Annual Balance Sheet, 1971­1999. Iran Statistical Yearbook 1373-2000, Tehran, Iran Statistical Center, 2000 140 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Annex 1.2. Housing Expenditure by Income Deciles Table A1-12. 2001 Household Summary: Annual Statistics by Expenditure Groups Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 Group 8 Group 9 Group 10 Total = 7.2m rials 7.2­9m 9­12m 12­16.5m 16.5­19.5m 19.5­24m 24­30m 30­45m 45­60m Above 60m Urban Household Av. Size 4.52 3.17 3.82 4.26 4.59 4.64 4.82 5.06 4.98 5.09 4.82 Av. no. employed (income) 1.37 1.14 1.23 1.27 1.35 1.37 1.42 1.45 1.49 1.54 1.5 Urban Tenure Type (%) Ownership of land and building 68.35 6.05 3.43 7.21 11.02 6.95 8.37 7.96 9.74 3.86 3.77 Ownership of building 0.71 0.08 0.05 0.03 0.15 0.03 0.09 0.09 0.08 0.03 0.07 Rent 16.49 2.66 1.40 2.23 3.04 1.62 1.65 1.27 1.52 0.55 0.54 Against service 2.77 0.12 0.06 0.13 0.25 0.33 0.32 0.57 0.66 0.21 0.11 Free 8.75 1.88 0.80 1.44 1.51 0.81 0.80 0.50 0.59 0.19 0.14 Miscellaneous 2.92 0.22 0.14 0.31 0.52 0.35 0.37 0.32 0.45 0.11 0.15 Characteristics of Urban Housing Unity Av. size (no. rooms) 3.7 2.51 2.94 3.23 3.53 3.77 3.94 4.1 4.33 4.55 4.75 Access to piped water (%) 98.59 95.58 97.79 97.92 98.82 99.2 98.71 99.32 99.63 99.84 99.83 Access to electricity (%) 99.88 99.63 99.86 99.93 99.85 99.84 99.93 100 99.94 100 99.83 Av. Expenditure for Urban Households Country 24.18 3.78 8.07 10.45 14.07 17.52 21.11 25.94 35.11 50.15 91.59 East Azarbayejan 22.20 3.68 8.20 10.52 13.87 17.62 21.02 26.36 34.81 49.38 98.46 Esfahan 20.23 4.18 8.11 10.59 14.06 17.28 21.06 25.38 34.76 49.20 82.51 Tehran 32.79 0.79 8.15 10.50 14.24 17.78 21.42 26.34 35.83 50.85 95.77 Khuzestan 21.41 5.05 7.54 10.45 14.19 17.61 21.28 25.69 32.90 49.91 66.91 Khorasan 20.64 3.89 8.02 10.33 14.04 17.28 20.64 25.52 35.07 49.11 102.91 Fars 23.16 4.61 8.12 10.46 14.01 17.61 21.02 26.50 34.61 51.45 85.83 Sources: 1997 Census; Iran Statistical Yearbook, 1379 (March 2000­March 2001); MOH, Household Survey 1379, Tehran, Iran Statistical Center. 141 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-13. Expenditure Trends for Urban Households by Income Decile, 1992­93 to 2000­01(RI m) Total expenditure Housing expenditure a Decile 1992/3 1993/4 1994/5 1995/6 1996/7 1997/8 1998/9 1999/0 2000/1 1992/3 1993/4 1994/5 1995/6 1996/7 1997/8 1998/9 1999/0 2000/1 First 0.67 0.95 1.4 1.8 2.3 2.97 3.6 4.5 4.9 0.25 0.4 0.54 0.75 0.97 1.2 1.6 2 2.2 Second 1.14 1.7 2.4 3.2 4.1 5.2 6.4 7.7 8.7 0.54 0.7 0.94 1.2 1.6 2 2.5 3.1 3.5 Third 1.5 2.3 3.2 4.3 5.5 6.8 8.4 10.1 11.4 0.67 0.87 1.1 1.5 2 2.5 3.2 3.9 4.3 Fourth 1.8 2.8 3.9 5.3 6.8 8.3 10.4 12.3 14.1 0.77 1 1.4 1.8 2.5 3.1 3.8 4.6 5.1 Fifth 2.1 3.4 4.6 6.4 8.2 9.9 12.3 14.7 16.6 1.01 1.3 1.7 2.1 2.9 3.6 4.5 5.3 5.9 Sixth 2.7 4.1 5.5 7.6 9.8 11.7 14.6 17.5 19.5 1.1 1.5 1.9 2.4 3.3 4.1 5.1 6 6.5 Seventh 3.3 4.9 6.5 9 11.7 13.8 17.4 20.8 23.3 1.36 1.7 2.2 2.8 3.9 4.8 5.9 6.8 7.7 Eighth 3.8 6 8 11.1 14.4 16.9 21.2 25.2 28.5 1.65 2.1 2.6 3.4 4.6 5.6 7 8 9.2 Ninth 4.9 7.7 10.4 14.5 18.8 22 27.8 33 37.3 2.1 2.7 3.2 4.1 5.8 7 8.9 9.9 11 Tenth 9.3 14.7 19.6 21.2 35.9 42.4 51.8 63.1 74.5 3.3 4.2 4.7 6.1 9.4 10.5 13.4 14.8 17.2 Average 3.07 4.6 6.2 8.8 11.06 13.3 16.7 20.7 24.1 0.97 1.6 2.04 2.7 3.7 4.47 5.6 6.6 7.6 a. Housing expenditure is the sum of rent and water, fuel, and electricity expenses. Source: Statistical Center of Iran, "The Results of the Statistics from the Expenditure of the Urban Households, 1973­2000." Central Bank of Islamic Republic of Iran , Statistics from the Expenditure and Income of the Urban Households, 1970­1986. 142 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-14. 2001 Annual Gross Household Expenditure by Income Decile (RI million) Total Household Decile Average 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Avg. Household Income 22.39 3.49 7.55 10.19 12.48 14.90 17.58 20.71 24.86 31.84 64.32 Urban Nonfood 18.5 3.18 5.61 7.46 9.36 11.11 13.23 16.03 20.1 27.43 60.38 Food, beverages, tobacco 6.81 1.76 3.11 4.01 4.73 5.56 6.34 7.32 8.45 10.07 14.2 Total 25.31 4.94 8.72 11.47 14.09 16.67 19.57 23.35 28.55 37.5 74.58 Of which housing 7.6 2.25 3.59 4.37 5.14 5.89 6.53 7.7 9.16 11.08 17.21 1. Rent (1) 6.75 1.96 3.11 3.79 4.48 5.11 5.69 6.72 8.09 9.94 15.74 2. Water, fuel, light 0.85 0.29 0.48 0.58 0.66 0.78 0.84 0.98 1.07 1.14 1.47 Avg. Household size 4.52 3.05 3.94 4.38 4.56 4.72 4.7 4.93 4.96 5.01 4.93 Rural Nonfood 9.31 1.25 2.4 3.36 4.56 4.66 5.93 7.38 9.58 13.2 27.36 Food, beverages, tobacco 6.63 1.16 2.54 3.5 4.3 5.19 6.28 7.21 8.49 10.31 17.01 Total 15.94 2.41 4.94 6.86 8.86 9.85 12.21 14.59 18.07 23.51 44.37 Of which housing 2.49 0.75 1.26 1.53 1.83 2.19 2.46 2.79 3.26 3.87 4.94 Rent a 1.63 0.5 0.81 0.97 1.17 1.45 1.6 1.85 2.18 2.56 3.17 Water, fuel, light 0.86 0.25 0.45 0.56 0.66 0.74 0.86 0.94 1.08 1.31 1.77 Avg. household size 5.27 2.66 4.2 4.99 5.11 5.43 5.71 5.72 6.02 6.31 6.63 a. Rents and rental value of owner occupied housing, repair and maintenance; (2) Totals are the sum of rounded figures. Sources: 1997 Census; Iran Statistical Yearbook, 1379 (March 2000­March 2001); MOH, Household Survey 1379. 143 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Annex 1.3. Housing Markets Iran's housing market is highly segmented by geography and household income. It is somewhat misleading, therefore, to present aggregate figures for demand and supply. This abstraction will nevertheless be supplied, but it will be complemented by analysis of segments (by regions or income distribution) where appropriate. Housing Conditions Iran has a relatively high percentage of homeownership, but recent government efforts to extend homeownership to more low-income households have largely failed. The 2001 household survey suggests that, among urban households, about 69 percent own their homes (and generally also the land). Ownership is only 55­58 percent among low- income households (the bottom 40 percent in the income distribution--with annual expenditure below IRR 9 million, compared with 64­79 percent for the rest of the population. In 1991 ownership among the low-income groups was on average 71 percent. Population has been estimated at 64.9 million by March 2002; 41.9 million of those reside in urban areas and 23 million in rural areas. Housing conditions in Iran--the quality of the housing unit (as measured by the facilities households have access to), household densities, household size, number of rooms--have gradually improved over the past decade. Household density has dropped from 1.18 in 1986­97 to 1.15 in 1996­97, and the number of individuals per room has gone from 1.53 in 1986­87 to 1.38 in 1996­97. During this period, the number of houses made of durable materials has increased204 from 46 percent to 61 percent, and access to telephone and gas rose 20 percent.205 These improvements aside, low-income households have experienced substantial hikes in their housing budgets, particularly of those in the first decile. In addition, this improvement is more marked in urban areas. Housing Demand Taking into account the maturing of Iran's sizable baby-boom generation (figure A1- 1),206 it has been said that as this generation marries, it will create a demand for 500,000 new housing units per year on top of current demand.207 In order to give an idea of the magnitudes involved in housing demand see table A1-15. About 113,000208 units per year over the next three years should be added to the total effective demand of 570,000209 204The durability of the residential unit is related to the type of materials used. According to the definition of the Statistical Center of Iran, buildings are classified as: durable, semidurable and nondurable. 205Iran provides nearly 100-percent access to piped water and electricity. 206Population projections from 2005 to 2035 produced by the World Bank's Human Development Network indicate annual population growth rates ranging from a high of 1.74 percent in the earliest years to a significantly lower 0.90 percent in 2035. Figure 1-1 shows the projection of household formation assuming an average household size of 4.6 (slightly lower than the current urban household size of 4.73). 207Local experts estimate that about 400,000 are in urban areas and 100,000 in rural areas. The annual demand for 600,000 new jobs does not necessarily translate into demand for housing. 208Currently there are 1.63 million households sharing accommodation--resulting in a need for 340,000 households (at the current household size of 4.79). 209Assuming no changes to household size and household density, it has been estimated that an additional 889,000 units will be added to the demand for housing in the next 5 to10 years as the baby boomers mature (approximately 144 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 units per year--to the extent that the government intends to reduce household density to 1.12 by the end of the Third FYDP. Therefore, current production of 520,000 units per year (in 2000­01) appears to be nearly sufficient for an effective demand of about 570,000 new housing units per year--considering only the economically active population--assuming that only the employed will be able to purchase a home. Statistics on housing demand by income group are not readily available in Iran. An estimate for the low-income groups (table A1-16) suggests that its need for housing during 2000­04 is slightly more than 1 million housing units,210 around 30 percent of the annual total demand estimated above. Based on the purchasing power estimated for the low-income groups (see section 4), these households are able to afford only social (i.e., subsidized) accommodations under the development plan. Yet the supply of social units has ranged from only 66,000 to 133,000 housing units per year in the 1999­00 to 2003­ 04 period, or merely 45 percent of the units these groups require. This situation is further worsened in that only 7­9 percent of the actual housing supply, as a percentage of total supply, is social housing. The FYDP called for 13­18 percent. Figure A1-1. Projected Population and Households, 2005 - 2035 (thousands) 120,000 25,000 100,000 20,000 80,000 15,000 Population 60,000 Households Population 10,000 40,000 Households 20,000 5,000 0 0 2005 2010 2015 2020 2025 2030 2035 Year Source: World Bank Statistical Database 89,000 units per year). This increases effective demand to approximately 569,000 units per year. Obviously, this demand will be higher if household density is reduced to 1 and household size is temporarily reduced to 2 (for newlywed couples). 210Naser Nikooseresht , "The Main Issues in Housing Market: Policies, Strategies, and Implementation" (Bureau of Housing Economics BHE, No. 32), 3­10. 145 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-15. Estimation of Annual Demand for New Housing in Iran, 2000­01 Existing housing Working age population Desired Annual desired flow (m units) Average stock Million Average housing Replacement c Shortfall Population Total actual Million annual growth stock b reduction d growth e flow f (percent)a 12.2 45.40g 3.5 27.24 0.31 0.59 0.95 1.85 0.510 12.2 16.03a 1.75 9.62 0.31 ­ 0.17 0.48 0.510 a. 1998 Economically active population of 10 years and over. Growth rate estimated for 1993-1998. This rate has come down from 6.2 percent in 1983­1988 and 3 percent in 1989­1992. b. Benchmark for industrial countries of 60 percent of estimated working age population--this ratio is consistent with Dhonte et al., Demographic Transition in the Middle East: Implications for Growth, Employment and Housing, IMF Working Paper WP/00/41, March 2000. c. 2.5 percent of existing stock (30-year life of unit growing at 2.5 percent)--consistent with Dhonte et al. d. Elimination of the gap between actual and desired stock over a 30-year period at a steady geometric rate of 5 percent per year--consistent with Dhonte et al. e. Growth rate of the working age population times the desired housing stock. f. Annual production reported for 2000/1. g. Total population. Source: 1997 Census; Iran Statistical Yearbook 1379 (March 2000­March 2001); Household Survey 1379. Therefore, an incongruence between the housing plan and the actual needs of the different income groups will impede the translation of this need into effective demand due to first, the lack of long-term finance for house purchase; second, the limited supply of affordable low income housing for both rent and purchase (even mass producers build mostly for the middle-income households--Q4 to Q8 in income distribution). Indeed, in the absence of long-term finance for low-income households, their only option available is rental accommodation, of which there is a limited supply, mostly because long-term finance is insufficient for rental housing. Table A1-16. Need for Housing by Low-Income Groups in Iran Year Number (thousand units) Requested Investment (RI b) 1999­2000 146 7,665 2000­01 175 11,287 2001­02 211 15,192 2002­03 250 19,500 2003­04 292 24,747 Total 1,074 78,391 Source: Naser Nikooseresht, "Main Issues in Housing Market: Policies, Strategies, and Implementation" (BHE, No.32), 3­10. 146 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Housing Supply According to the available estimations by the MPO (based on growth projections), there are expected to be 12.2 million housing units by March 2002--8.1 million in urban areas and 4.1 million in rural areas.211 Based on estimations of 13.8 million households, the current household density may be 1.13, and may be the result of an increase in the supply of housing in the period from 1996­97 to 2000­01; more than 1.2 million housing units were built during these years in urban areas, corresponding to 146 million m2. If density is indeed approaching 1.13, it appears that the density target (i.e., 1.12) of the Third FYDP is well within reach. To the extend that the actual population and household growth rates are different from those assumed in the plan by the MPO, and to the extent that the estimates on housing completions (mainly in rural areas) are different in reality, the actual household density may be slightly different from that of 1.13. This supply, however, appears to have addressed the demand by middle- and high-income (top 20 percent of income distribution) groups. An analysis of the results of the First and Second FYDPs and the first three years of the current plan, shows that the first two plans delivered fewer housing units (74 percent and 92 percent respectively) than expected. Because the average unit was larger than originally envisaged (53 and 15 percent respectively), total expenditures were well over budget.212 As partial proof of this, figures for the first three years of the Third FYDP suggest that Iran has met targets for new housing units. The share of "social" housing, however, was only 7­9 percent of the units; the target was 13­18 percent. A similar performance was estimated for "supported" housing and as a result more private-sector "free" houses were built than allowed for in the budget. Since in the Second plan, one of the key goals was to build social (with less than 50 m2), supported, and free housing units, it is clear that the failure to produce enough affordable units to the low-income groups may eventually worsen the distribution of housing in Iran. It is said that 95 percent213 of the housing construction is carried out by nongovernmental groups. But when cooperatives, foundations, and quasi-public government companies are taken into account, it is clear that the actual involvement of the public sector is significantly higher than 5 percent. An examination of rent-to-own schemes214 in Iran since their inception in March 1999 (table A1-17) shows that the government intervened, through these schemes, in approximately 9 percent of the units built in 1999. The Third FYDP (table A1-19) shows that the government intends gradually to increase this intervention to 14 percent by 2004, reaching an overall intervention of 12.6 percent under 211MOH, Planning Bureau, Population and Housing Statistics, 1976­2002. 212The volatility and discrepancy between government budget and actual expenditures can be traced to several reasons. The most important one is that before the Oil Stabilization Fund (OSF) was established, changes in oil prices had a huge impact on Iran's economy, enhancing the business cycles and partly determining housing supply. For example, in 1995­96, the government decided to finance only up to 60 percent of those projects that already had committed funds (irrespective of whether they were under construction). Similarly, due to the emphasis given to the housing sector as a potential engine for growth and redistribution made the government increase its expenditure significantly in the following years. Presumably many more houses than planned were started. The OSF is expected to minimize the impact of oil prices on the economy and therefore reduce the cyclical influences on housing supply. 213MHUD, Interview with the Planning Bureau. 214Rent-to-own schemes awarded title of the property only upon total repayment of the loan. 147 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 the current housing plan. The extent of this intervention varies; therefore the effective percentage of government-provided rent-to-own units might be as high as 7 percent215. This is consistent with the estimate supplied by the MPO experts--namely, that the share of production budgeted (100 percent) for the public sector between 1999 and 2004 would be 7.5 percent. The Second FYDP set aside 9 percent of total housing expenditures toward rent-to-own schemes, apportioned as follows: · the public sector would supply 48.9 percent (i.e., providing both land and paying the construction costs); · the private sector, in partnership with the government, would supply 37.8 percent (i.e., government-provided land; construction costs borne by the private sector); · 13.3 percent of the rent-to-own schemes would be fully private. Table A1-17. Rent-to-Own Housing in Iran since March 1999 Type of execution Status of operation Number of Number of Land Area Total Built Area arrangement by phase projects units (m2) (m2) Contractinga Design 19 3,627 203,681 184,625 Execution 197 38,137 2,538,170 1,998,777 Completed 123 11,399 745,547 620,051 Contributiveb Design 60 6,763 1,274,817 384,652 Execution 70 29,902 1,862,825 1,630,944 Completed 24 4,472 294,380 266,606 Privatec Design 37 10,951 690,705 554,102 Execution 35 3,421 205,771 181,121 Completed 3 146 9,226 7,200 Total 668 108,818 7,825,123 5,828,078 Totals may not add up due to rounding. a. Government provides land and cost of construction, but contracts out to private. b. Participatory joint venture. Land and supervision by government. c. Qualifies for 8 percent loan. Source: Planning Unit of the MOH. The key issue, however, is whether the private sector can take on the challenge and then assume the investment spelled out in the Third FYDP. Of the total investment specified in the national plan (RI 579,642 billion in constant 1999 prices), 63 percent is identified as private-sector investment (i.e., IRR 106,243 billion). In addition, the plan assumes a much larger annual growth rate (i.e., 8.5 percent for private investments versus 7.1 percent for all investment), even for the housing sector (9.5 percent). Of the total investment, 24.5 percent is assumed to have taken place in the housing sector (i.e., IRR 142,060 billion), 67 percent by the private sector. Therefore, a net 16.4 percent of total 215Assuming that land provided under partnership agreements is 20 percent of total construction costs. 148 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 national investment is assumed as private investment in housing. So, in addition to a 16.4 percent investment in private-sector housing, it is assumed that this sector will see greater growth than other sectors in the economy. Is this a realistic, achievable target? This is a key issue for Iran to address. Stable economic and foreign exchange conditions, higher oil prices, and, more recently, an increase in the housing loan ceiling from IRR 30 to 50 million have greatly increased housing supply.216 Housing transactions in major cities have declined, however, since mid-2001, a trend expected to continue in the short term. This may reflect a reduced demand for housing, which may ultimately affect Iran's efforts to meet the goals of the Third FYDP. Concerning supply of rental properties, prices are rising rapidly (see Table A1-18), and security deposits are punitively large, representing nearly two years of rent or more. These large mandatory deposits require prior wealth, something the poor by definition do not possess. They are also a testament to the high inflation rates. Obviously, the rental market is almost entirely inaccessible to low-income households. In short, these trends reveal serious imbalances between housing demand and supply, especially in major cities. Table A1-18. Trends in Monthly Rents and Deposits in Major Cities Tehran Esfahan Shiraz Year Rental Deposit Ratio Rental Deposit Ratio Rental Deposit Ratio 1375 (1996­97) 3,387 108,109 32 1,803 38,925 22 1,225 40,986 33 1376 (1997­98) 4,345 116,910 27 2,051 46,732 23 2,513 54,553 22 1377 (1998­99) 5,060 130,894 26 2,372 53,816 23 2,857 68,417 24 1378 (1999­2000) 5,805 160,998 28 3,001 65,926 22 3,425 86,059 25 1379 (2000­01) 7,595 195,078 26 3,678 81,804 22 4,113 93,483 23 Five-year change (percent) 224 180 204 210 336 228 Source: Housing, Construction and Infrastructure Statistics, Tehran: Statistical Center of Iran, 2001. Article 10 (budget law, June 1998), concerning the supply of rental residential units, sought to encourage the supply and management of rental housing. It states that the government is committed to encouraging the supply of nongovernmental rental units and to proffer the possibility of ownership. For example, the rental income tax could be waived for residential units of up to 120 m2 and for residential complexes of more than three units serving as rentals for at least five years. This law, along with recent modifications to laws affecting owners and tenants, may increase the number of rental units on the market. But if the government wishes to address the housing needs of the poor, then it should seek to ease legal constraints and dispense with cumbersome 216Esfahan Municipality, "Report on Housing Transactions (Selling and Buying) in Isfahan City." 149 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 administrative procedures that prevent the owners of rental units from supplying badly needed housing. Table A1-19. Estimated Housing Supply for the Third FYDP Base year FYDP budget Total Quantitative indicator 1998­99 1999­00 2000­01 2001­02 2002­3 2003­04 1999­2004 Total housing 464 510 560 620 680 744 3,114 production (equivalent thousand units) Housing units = 100 122 146 175 211 250 292 1,074 sq. m./unit (equivalent thousand units) Urban rent-to-own 41.4 54.4 64.6 77.4 91.2 106.8 393.6 units built (equivalent thousand units) Units built for sale 36.5 47.6 60.8 77.4 100.8 127.2 413.8 (equivalent thousand units) Investment (RI b) Total (constant prices) 21,180 23,580 25,840 28,360 30,940 3,340 142,060 Total (current prices) 2,180 26,407 35,478 43,277 51,546 59,879 216,587 Totals may not add up due top rounding. Source: Third Housing Development Plan, Tehran: MHUD, 2000 Regional Housing Markets in Iran The most important urban centers in Iran are in the provinces of Tehran, Esfahan, Fars, Khorasan, West Azerbaijan and Khouzestan, all of which have acceptable to excellent housing conditions (Table A1-20). According to the last census, these provinces hold 53 percent of Iran's population (i.e., 32 million people) and 59 percent of its housing stock. In the past five years, 62 percent of new housing has been supplied in these regions (Table A1-22). As these provinces (except for Eastern Azarbajan) receive a significant number of immigrants every year (Table A1-21), the performance of the housing sector in Iran is likely to continue being closely linked to the performance of these regions. Regional Differences in Housing Supply and Affordability Table A1-24 shows key socioeconomic data for these six provinces, such as unemployment (ranging from 8.7 percent in West Azerbaijan to 19.8 percent in Khouzestan), and average annual expenditure on housing (from IRR 5.1 million in Khouzestan to IRR 12.6 million in Tehran). Further regional differences can be shown by the increase in the number of housing units between 1996­01 and 2000­01, in terms of building capacity. For example, Table A1-22 shows that Tehran built an average of around 75,000 units per year, while Khouzestan built only 7,000 units per year, and many other, less-populated provinces built fewer than 5,000 units per year. 150 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-25 shows that between 1996 and 2000 affordability has significantly increased for these six urban centers. For example, the price-to-income ratio for Teheran has dropped from 9.7 to 5.9 and in Esfahan from 10.9 to 8.2. These regional averages hide important differences that exist by income group. Using data available for Tehran, Esfahan and Fars, Table A1-27 shows the extent of regional differences concerning housing affordability and possibility of ownership, by income decile. Overall, Tehran shows the lowest housing purchasing power across the board, except for households in the top 30 percent of the income distribution, which experience a 65 percent increase in housing purchasing power over the households immediately below them on the income scale. On average, Fars has the highest average housing purchasing power at 79 m2, in comparison with Teheran (61 m2) and Esfahan (65 m2); it also has the highest housing purchasing power for low- and middle-income households. Both Fars and Esfahan show extremely high housing purchasing power for the top 10 percent of the households. Table A1-20. Housing and Employment Conditions by Provinces in Iran Housing conditions Best Proper Acceptable Improper Critical Employment Best Kerman Chahrmahal va conditions Bakhtiyari Azarbayjan Gharbi Ardabil Azarbayjan Sharghi Tehran Hamadan Markazi Esfahan Yazd Semnan Khorasan Ghom Ghazvin Fars Zanjan Golestan Kurdistan Booshehr Mazandaran Hormozgan Khoozestan Gilan Kohgilooye va Booyer Worst Lorestan Eelam Kermanshahan Sistan va Baloochestan The regions are classified according to a relative standard score showing how different the performance of the region is compared to the average performance of all regions. The four indicators used are household density, percentage of durable housing, average housing production in the past 5 years, and the ratio of housing stock growth rate to family growth rate. Source: Minoo Rafiei, "Housing, Employment, and Sustainable Development," October 2001. 151 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-21. Migration into Selected Provinces in Iran, 1986­96 (thousands) Province 1996­97 population Net of migrants Ratio of migrants to total population Tehran 11,176 429 3.8 Esfahan 3,923 91 2.3 Fars 3,817 6 0.1 Khorasan 6,047 9.3 1.5 West Azer 3,326 ­85 ­2.5 Khouzestan 3,746 1021 2.7 (1) This high number is due to the arrival of war immigrants. Source: Statistical Center of Iran, Public Census of Population and Housing of the Provinces of the Country, 1996. Table A1-22. Characteristics of Urban Housing Completions in Selected Provinces Characteristic Region 1996/7 1997/8 1998/9 1999/0 2000/1 Number of units Country 204,688 193,641 210,994 291,046 339,659 Tehran 66,509 65,727 58,632 89,328 96,316 Esfahan 18,694 21,360 20,840 24,484 33,049 Fars 10,937 8,791 8,737 12,301 15,884 Khorasan 20,458 18,116 25,430 32,752 37,674 West Azer 12,179 11,445 11,812 7,652 9,949 Khouzestan 6,342 3,778 5,591 8,992 12,064 Floor area (100 m2) Country 24,737 22,504 25,470 34,144 39,257 Tehran 3,048 6,976 6,879 10,424 13,346 Esfahan 2,747 2,744 2,707 3,312 4,150 Fars 1,542 1,341 1,106 1,684 2,298 Khorasan 2,522 2,302 3,191 3,204 4,602 West Azer 1,437 1,234 934 945 1,151 Khouzestan 1,173 503 786 975 1,659 Cost of land and floor Country 2,087 2,084 2,100 3,915 5,188 area (RI b) Tehran 882 830 586 1,418 1,891 Esfahan 180 156 208 345 444 Fars 108 115 87 171 259 Khorasan 180 156 254 302 565 West Azer 82 128 78 108 146 Khouzestan 79 41.6 56 137 233 Source: Central Bank of Islamic Republic of Iran, Report on Construction Activities in the Urban Areas of the Country, 1996­2000. 152 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-23. Characteristics of Urban Housing Starts in Selected Provinces Characteristic Province 1996­97 1997­98 1998­99 1999­2000 2000­01 Floor area (1000 m2) Country 31,595 23,707 34,630 36,365 43,061 Tehran 11,752 7,754 7,471 9,184 15,159 Esfahan 4,532 2,227 5,445 3,439 4,520 Fars 1,391 1,567 1,843 2,248 2,214 Khorasan 2,832 1,772 3,155 3,746 3,518 West Azer 1,711 1,317 1,132 1,128 770 Khouzestan 962 713 1,131 1,460 1,857 Cost of 1 m2 of land (RI Country 0.31 0.35 0.23 0.327 0.49 m) Tehran 1.3 1.4 1.1 1.5 2 Esfahan 0.23 0.25 0.21 0.23 0.28 Fars 0.18 0.22 0.19 0.23 0.24 Khorasan 0.16 0.37 0.15 0.18 0.26 West Azer 0.13 0.192 0.29 0.28 0.24 Khouzestan 0.096 0.08 0.12 0.15 0.21 Cost of 1 m2 floor area Country 0.39 0.43 0.43 0.49 0.57 (RI th) Tehran 0.57 0.58 0.6 0.67 0.73 Esfahan 0.22 0.34 0.35 0.39 0.44 Fars 0.38 0.47 0.47 0.57 0.59 Khorasan 0.26 0.31 0.31 0.35 0.44 West Azer 0.3 0.38 0.38 0.48 0.46 Khouzestan 0.32 0.36 0.41 0.44 0.51 Total investment (RI b) Country 3991843 2721827 173840 5343784 7250362 Tehran 1635008 1118014 10332 1709010 2926115 Esfahan 262516 227155 24242 302124 500130 Fars 110049 170901 9861 314201 363904 Khorasan 209101 217807 22470 445394 486990 West Azer 159458 157371 9099 195228 134309 Khouzestan 71779 74110 8845 188621 319332 Source: Central Bank of Islamic Republic of Iran, "Report on Construction Activities in the Urban Areas of the Country, 1996­2000." 153 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-24. Statistical Summary for Selected Regions, 2001 Country East Azarbayejan Esfahan Tehran KhuzestanKhorasan Fars Population ('000) a 60,994 3,696 3,923 11,176 3,747 6,048 3,817 Private Settled 59,844 3,284 3,864 11,009 3,648 5,950 3,704 Institutional 938.00 412.00 58.00 167.00 63/00 94.00 58.00 Private Unsettled 211.41 0.27 1.29 0.18 36.31 3.59 55.00 Housing Units (`000)b 10,770 Urban Units 6,914 Rural Units 3,856 Households ('000) 12,398 695.00 889.00 2,596 645.00 1,283 755.00 Urban Households 7,949 446.00 670.00 2,227 736.00 425.00 448.00 Rural Households 4,410 249.00 218.00 369.00 547.00 214.00 297.00 Unsettled Households 38.94 0.05 0.25 0.12 0.65 6.26 9.81 Urban with Piped Water (%) 98.59 95.69 99.86 99.85 99.40 99.74 99.57 Urban Average Prices per Sq. Mt. Land (RI m) c 0.66 1.03 1.89 0.60 0.78 0.82 Built Area (RI m) d 0.94 1.14 2.25 0.89 0.92 1.04 Monthly Rent IRR th e 4.34 3.68 7.60 3.96 3.96 4.11 Deposits IRR th e 49.08 81.80 195.08 72.86 57.92 93.48 Construction IRR th f 613.81 517.42 540.59 591.50 692.68 609.44 704.00 CPI g 159.70 160.30 153.10 159.60 166.10 159.90 158.20 Urban Av. Annual Income (RI m) 22.39 19.70 19.62 30.71 22.46 18.11 25.58 Urban Av. Annual Gross 25.31 22.20 20.23 32.79 21.41 19.64 23.16 Household Expenditure Nonfood (RI m) 18.50 16.21 14.58 25.33 13.68 13.24 16.52 Food, Beverages, Tobacco (RI m) 6.81 5.99 5.65 7.47 7.73 6.40 6.64 Of which Housing 7.60 6.78 5.92 12.66 5.07 5.55 7.57 Rents (RI m) h 6.75 5.74 5.08 11.88 4.33 4.82 6.62 Water, fuel, light (RI m) 0.85 1.04 0.84 0.79 0.74 0.73 0.95 Av. Size of Household 4.79 a. 2002 population was estimated as 64.9 million; 41.9 million in urban areas and 23 million in rural areas. b. In 1997. Estimates for 2001 reach 12.2 million. c. For dilapidated residential buildings transacted by real estate agents. d. For housing units transacted by real estate agents e. Agreed in contracts completed by real estate agents. f. Net built area. Informal evidence says that provision of water, electricity, wastewater, etc to site during construction is about 300,000/sq. m. g. 1998=100. h. Rents and rental value of owner occupied housing, repair and maintenance. Sources: 1997 Census; Iran Statistical Yearbook 1379 (March 2000­March 2001); Household Survey 1379; Provided by MOH (population and Housing Indicators 1976­2002). 154 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-25. Affordability of Housing in Selected Provinces (RI millions) Province 1996­97 1997­98 1998­99 1999­2000 2000­01 Av. Price to Av. Price to Av. Price to Av. Price to Av. Price to house income house income house income house income house income price ratioa price ratio price ratio price ratio price ratio Tehran 145 9.7 148 8.1 150 6.5 165 5.9 218 6.6 Esfahan 92 10.9 108 10.1 130 9.2 143 8.2 171 8.4 Shiraz 87 7.7 101 6.8 104 6.3 117 5.6 153 6.6 Mashad 52 5.5 61 5.4 76 5.2 81 4.1 146 7.1 Tabriz 59 6.5 67 5.8 75 5.1 84 4.6 111 5 Ahvaz 49 4.2 54 4.1 61 3.8 74 4.1 102 4.8 a. Household expenditure is used as proxy for household income, for all years. Source: Statistical Center of Iran, The Results of Statistics from the Price of Land and Housing, 1996­ 2000. Statistical Center of Iran, The Results of Statistics from the Expenditure and Income of the Urban Households, 1996­2000. Table A1-26. Household Expenditure and Unemployment Rate in Selected Provinces, 2000­01 Province Average Housing Unemployment Price index Average expenditure expenditure expenditure rate (percent) (1996/7 base to average national (RI m) (RI m) year) pricea Country 24.1 7.6 13.86 645 24.1 Tehran 32.7 12.6 12.19 635 33.2 Esfahan 20.2 5.9 13.87 674 19.3 Fars 23.1 7.6 15.8 689 21.6 Khorasan 11.6 5.5 13.64 658 11.3 West Azer 22.2 6.7 8.75 673 21.2 Khouzestan 21.4 5.1 19.8 658 20.9 a. The average expenditure to national price is obtained by dividing the average expenditure of each province by the relative prices of the province. The relative price in the province is estimated by dividing the price index in the province by the price index in the country. Source: Statistical Center of Iran, The Results of the Statistics from Expenditure and income of the Urban Households of the Country, 2000 155 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-27. Housing Condition in the Urban Areas of Selected Provinces by Income Group Province/Decile Average First Second Third Fourth Fifth Sixth Seventh Eighth Ninth Tenth Tehrana Total 32.8 6.8 13.4 17 21.3 23.2 30.5 33.1 61 63 82 expenditure (RI m) Housing 11.5 2.9 5.4 6.4 8 8.7 11 12 20 22 24 expenditure (RI m) Housing 61 15 28 34 42 46 58 64 106 118 153 purchasing power (m˛) % of rental 24 31 34 36 30 21 19 20 18 16 12 units % of durable 93 86 85 89 90 94 95 96 94 98 99 housing units Esfahanb Total 20.2 4.1 8.2 11 13.5 15.2 18 21 26 35 68 expenditure (RI m) Housing 5.9 1.5 3.2 4 4.8 5.2 5.7 6 7 8.7 16 expenditure (RI m) Housing 65 16 35 44 53 58 63 66 77 96 175 purchasing power (m˛) % of rental 19 32 30 27 28 23 20 16 14 13 10 units Farsc Total 23 4.6 8.1 11.2 14 16.5 21 24 28 34 69 expenditure (RI m) Housing 7.5 1.7 3.4 4.8 6.1 6.9 7.4 7.8 8.1 9 20 expenditure (RI m) Housing 79 18 36 50 64 72 78 82 85 94 210 purchasing power (m˛) % of rental units a. Rent price per m2/month: IRR 15,633. b. Rent price per m2/month: IRR 7,600 . c. Rent price per m2/month: IRR 7,907. (4) Housing expenditure figures are converted into housing purchasing power (m2) using the rent price per m2 per month. Because actual rental rates vary significantly from decile to decile, housing purchasing power (m2) may vary. Source: Statistical Center of Iran, "The Results of Statistics from the Expenditure and Income of the Urban Households of Esfahan (Tehran and Fars produced separately) Province, Year 2000," unpublished. 156 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Annex 1.4. The Development Plans The First and Second Five-Year Development Plans One objective of the Second FYDP was the mass production of housing. The implementing agencies included civil organizations such as the municipalities, cooperatives, and nonprofits including Bonyad, Mostazafan, and Janbazan, and other public institutions. It was intended that the government would pay only 20 percent of the total investment.217 The reluctance of the implementing agencies to respond caused the Ministry of Housing and Urban Development (MHUD) to intervene by building a considerable number of small dwellings throughout the country. It is understood that MHUD tried to launch the scheme in 1999 by building a large number of small dwellings, some of which are already occupied. A recent significant rise in mass- produced housing in Tehran has been associated with the unification of the exchange rate and the stagnation of durable goods and gold markets.218 The Third Five-Year Development Plan The overall objective of the Third FYDP is to increase housing supply and to encourage mass production of smaller housing units (see Table A1-28). In addition, the plan aims at increasing the share of rentals to at least 15 percent of new annual production and reducing the rate of demolition. Table A1-28. Key features of the Third FYDP Issue Large cities Small cities (200,000- Urban Rural (>1m people) 1m people) areas areas Maximum built area (m2) 85 100 Land/capita (m2) 30 60 Source: The Third Housing Development Plan, Tehran: MHUD, 2000 The four strategic objectives considered in this plan are: · To establish investment security at a macro scale and in housing mass production in order to absorb domestic and foreign capital, in tandem with the adoption of desirable technology and the development of a professional and efficient construction industry · To support the builders of small-size housing units with emphasis on housing complexes and mass production, by encouraging the formation of professional associations and financial institutions that can provide housing for the low- income group, the vulnerable, and the residents of rural areas. · To establish coordination between (a) taxation policies and subsidies and (b) policies and terms and conditions of housing supply and demand. In addition, a linked objective is the promotion of insurance for housing units. 217Mr. Fardanesh, Satisfactorily Small, October 2001 218Minoo Rafiee, Housing Mass-Production in Tehran: For Whom Do They Build? 157 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 · To reduce government control and at the same time strengthen local powers (provincial agencies and municipalities) to participate in housing planning management, urban land market management (including lands that belong to the government), promoting the concept of rental housing and strengthening and completing the chain of housing cooperatives. Conclusions The quantitative targets of the current housing plan, shown in Table A1-29, are broken down by rural/urban and type of unit (i.e., rent-to-own or for sale).219 The plan is extremely ambitious, and although it is quite likely that the overall targets will be met, the individual targets are another matter. Again, this will likely result in an oversupply of housing for the middle- and high-income groups and an undersupply of affordable housing for the poor. Although suitable in theory, the plan may be fraught with practical difficulties. Unless properly implemented (i.e., supply constraints must be addressed in tandem), these housing policies may feed into speculative demand and result in even greater misallocations of housing along income lines. Legal and banking regulations make it difficult for low-income groups, which live in informal settlements, to gain access to financing. Gains are likely to be accrued by mass-housing suppliers and by middle- and high-income speculators. 219The plan has assumed a target annual rate of demolition, depreciation and renovation of 1.69 percent in the whole country, of 1 percent in urban areas and of 3.3 percent in rural areas. The annual household rate of growth of the total country during the period of the plan was assumed as 2.8 percent. 158 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-29. Evaluation of the First and Second FYDPs, and Initial Years of the Third FYDP Plan Year Description Total Rural Urban Rural built area Urban av. built area residentialresidential residential units (million sq m) (million sq m) units (th) units (th) (th) First 1989­90 Planned 292 39 97 Actual 279 93 186 29 155 1990­91 Planned 307 30 97 Actual 226 75 151 24 157 1991­92 Planned 315 31 97 Actual 337 112 225 36 150 1992­93 Planned 328 22 96 Actual 430 143 287 43 144 1993­94 Planned 340 32 94 Actual 451 157 314 43 137 Total 1989-94 Planned 1,582 152 96 Actual 1,723 580 1,173 175 147 Second 1994­95 Planned 397 127 270 32 120 Actual 451 157 314 43 127 1995­96 Actual 447 156 291 32.5 112 Actual 510 170 340 44 130 1996­97 Planned 505 195 310 33 108 Actual 471 157 314 - 127 1997­98 Planned 579 249 330 33.9 103 Actual 424 141 283 34.8 123 1998­99 Planned 663 311 352 34 97 Actual 429 143 286 31.4 132 Total 1994-99 Planned 2,696 1,037 1,659 169.5 107 Actual 2,290 763 1,537a 188.2 123b Third 1999­2000 Planned 510 170 376c 35.7 97 Actual 456 152 304 38 127 2000­01 Planned 560 180 380 Actual 510 170 340 2001­02 Planned 620 190 430 Actual 430 Totals may not add up due to rounding. Urban numbers are obtained from the Central Bank Completions Report. This report is based on information collected for the annual survey of GDP and value added. Rural numbers are very rough and are compiled by the MOH based on reports by the municipalities. As a rule of thumb, rural housing is 50 percent of urban housing but it is difficult to verify. a. Includes both formal and informal housing (based on reports by the Central Bank of Iran). b. Only formal housing--actual average may be lower if informal housing is included. c. Inconsistent number of 340,000 units vs. 376,000. Source: Documents of the Third Development Plan in Housing Sector: Report No. 1, Assessment of First and Second Dev. Plans, pp. 13­16, 29­36. MOH, Planning Bureau, Population and Housing Indicators, 1976­2002; MUD, Second Five-Year Plan Economic, Social, Cultural Housing Sector. 159 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-30. Quantitative Objectives of the Third FYDP Base Budget for the Third Housing Development Total Annual Quantitative Indicator Year Plan Year Growth 1998­99 1999­0 2000­1 2001­2 2002­3 2003­4 1999­4 Rate (%) Urban rent-to-own units 15 16 17 18 19 20 - built/total units (%) Units built for sale/total 12 14 16 18 21 24 - units (%) Housing Production (`000 units) 304 340 380 430 480 520 2,160 11.7 - Urban 160 170 180 190 200 214 954 5 - Rural 464 510 560 620 680 744 3,114 9.1 - Total Built Area (Sq. Mt.) - Urban 33.4 37.4 41.04 45.2 49.4 53 226.1 9.7 - Rural 11.2 12.2 13.3 14.6 15.6 17.1 72.6 8.8 - Total 44.6 49.6 54.3 59.6 65 70.7 298.6 9.1 Housing Units = 100 sq 122 146 175 211 250 292 1,074 19.1 m/unit (thou units) Urban rent-to-own units 41.4 54.4 64.6 77.4 91.2 106.8 393.6 18.4 built (thou units) Units built for sale (thou 36.5 47.6 60.8 77.4 100.8 127.2 413.8 28.4 units) Investment (RI b) - Urban (constant 16,700 18,700 20,520 22,600 24,700 26,500 113,020 9.7 prices) 4,480 4,880 5,320 5,760 6,240 6,840 29,040 8.8 - Rural (constant 21,180 23,580 25,840 28,360 30,940 33,400 142,060 9.5 prices) 21,180 26,407 35,478 43,277 51,546 59,879 216,587 23.1 - Total (constant prices) - Total (current prices) Totals may not add up due top rounding. Source: Third Housing Development Plan, Tehran: MHUD, 2000 160 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Table A1-31. Actual vs. Approved Investment Budgets in the Housing Sector (RI billlion) Title 1996 1997 1998 1999 Approved Performed Approved Performed Approved Performed Approved Performed 2000 2001 2002 2003 2004 Total 6,443 1,613 6,606 17,000 6,725 22,475 7,114 26,475 26,306 35,478 43,277 51,546 59,879 investment By 425 399 495 1,122 560 1,391 750 1,623 1,503 1,944 2,338 2,767 3,215 government Development 68 64 81 183 91 227 103 564 447 525 607 705 820 credits Government 357 335 414 939 469 1,164 647 1,059 1,056 1,419 1,731 2,062 2,395 companiesa By non- 6,018 1,214 6,111 15,878 6,166 21,084 6,362 24,853 24,803 33,534 40,939 48,779 56,664 governmental sector Private 4,213 850 4,278 11,115 4,316 14,759 4,453 17,398 17,395 23,547 28,807 34,442 40,435 Cooperative 1,203 243 1,222 3,175 1,233 4,216 1,272 4,970 4,939 6,658 8,088 9,558 10,819 Public 602 121 611 1,588 616 2,108 636 2,485 2,469 3,329 4,044 4,779 5,410 foundations2 Note: Totals may not add due to rounding. a. This includes, for example, the construction company under the Housing Bank. (2) This includes, for example, the housing foundation. Source: Planning Bureau of the MOH. 161 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Annex 1.5. Input-Output for the Housing Sector, 1991­92 Item Input (Backward) Output (Forward) Wheat 0.00001 0.00618 Rice 0.000001 0.00031 Sugar beet and sugar cane 0.00001 0.00035 Other industrial crops 0.00002 0.00049 Other agricultural products 0.00001 0.00283 Livestock 0.00001 0.00211 Poultry 0.00001 0.0008 Various aquatics 0.00001 0.00015 Honey, silkworm seeds, 0.00001 0.00009 Lumber and saw wood 0.00 0.0115 Crude oil and gas 0.00011 0.00285 Coal 0.00003 0.01221 Iron ore 0.00008 0.00849 Copper ore 0.00001 0.00159 Building stones 0.00005 0.01405 Non-metallic mineral products 0.00018 0.00204 Dairy products 0.00003 0.00146 Sugar 0.00004 0.00126 Vegetable oil and fat 0.00004 0.00079 Poultry and livestock food 0.00005 0.00008 Tobacco products 0.00003 0.00003 Other food-stuff 0.00005 0.00251 Paper and paperboard 0.00048 0.00452 Print and publish 0.00027 0.0011 Articles of paper and paperboard 0.00034 0.00493 Turnery 0.00008 0.03217 Wood products 0.00064 0.01807 Cement 0.00008 0.01861 Glass and glassware 0.0001 0.00302 Other non-metallic mineral products 0.00014 0.0849 Textiles 0.00009 0.00517 Rug and Carpet 0.00005 0.00163 Clothing 0.00031 0.00151 Footwear and leather products 0.00013 0.00075 Chemical fertilizers and pesticides 0.00036 0.00043 Plastic products and synthetic fibers 0.00017 0.00687 Medicine and pharmaceutical products 0.00021 0.00076 Oil products 0.00004 0.02733 Rubber and plastic products 0.00015 0.00979 Other chemical substances 0.000018 0.0185 Steel and steelworks 0.00009 0.19191 Copper and articles thereof 0.00005 0.00404 Aluminum and articles thereof 0.00016 0.01297 Metallic articles in buildings and industry 0.00011 0.04992 Industrial machinery 0.00025 0.00538 Agricultural machinery 0.00009 0.00004 Radio, TV & communication equipment 0.00009 0.0008 Motor vehicles 0.00003 0.00146 Other industrial articles 0.00013 0.06716 162 Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 Item Input (Backward) Output (Forward) Electricity 0.00003 0.01344 Water 0.00004 0.0167 Natural gas 0.00004 0.00278 Buildings under construction 0.00006 0.00002 Residential buildings 1.00007 1.00007 Other buildings 0.00006 0.00348 Trade services 0.00004 0.04477 Gas & oil products distribution 0.00007 0.00528 Restaurants & cafes 0.00004 0.00398 Hotels & inns 0.00004 0.00078 Road & water transportation 0.00028 0.0793 Air transportation 0.00005 0.0091 Transportation side services 0.00008 0.00284 Communication services 0.00011 0.00224 Financial institutions, banks & insurance companies 0.00006 0.02273 Real estate 0.05529 0.00093 Business activities 0.00007 0.00637 Public services 0.00003 0.00054 Defense & disciplinary forces services 0.00006 0.00 Higher education & researches 0.00004 0.00042 Technical & vocational training 0.00004 0.00001 Public education 0.00007 0.00029 Hospital & health care services 0.00007 0.00036 Veterinary treatments 0.00003 0.00001 Benevolence services 0.00008 0.00001 Religious & other social services 0.00005 0.00004 Artistic & athletic services 0.00006 0.00018 Repair services 0.00007 0.00913 Other services 0.00003 0.00318 Total 1.86182 1.06283 Source: Statistical Center of Iran, Plan and Budget Organization, "The input-output table of Iran, 1991," Tehran, 1376 (1997). 163 Iran- Strategies for the Housing Sector Annexes ­ Chapter 1 Annex 1.6. Inflationary Prospects Inflation is declining at present. Nevertheless, high inflation (traditionally counter- cyclical) remains an important characteristic of the Iranian economy.220 In recent years, the suppression of imports, the reduction/elimination of some subsidies, and the depreciation of the market exchange rate have all contributed to rising prices. High inflation has also eroded wages despite the existence of a statutory minimum wage. With estimates of current unemployment at around 14 percent,221 and with inflation at 11.5 percent at end-August 2001 (at around the lowest levels for nearly a decade), a large multiplier effect of government stimuli could be expected. If so, demand stimuli would result in short-term growth without fueling inflation. This is quite likely to be the case, considering the reported growing confidence in the government.222 In Iran, however, the state conducts de facto management of supply (through ownership of the oil export industry) and demand (through its control of import licenses) of foreign exchange, influencing the value of the rial. To support nonoil exporters and to conserve its foreign exchange, the government is likely to want to maintain the current exchange rate. But as foreign exchange is not widely available in Iran and there are still purchase limits per person, there is always the risk of increased inflation (i.e., to the extent that demand stimulus leads to an increase in imports).223 In addition, inflation forecasts (17.5 percent for 2002­03)224 are linked to the unification of the rial at a floating exchange rate; Bank Markazi (the central bank) committed to the unification of the rial by the start of the FY2002 (March 21). Until then there were two legal exchange rates: an official rate fixed at IRR 1,750/US$, and the floating market rate set on the Tehran Stock Exchange (TSE) trading at around IRR 7,900/US$. To offset the inflationary impact of the abolition of the official rate,225 Bank Markazi aims to use the additional revenue the government will generate by calculating its oil-export revenue at the market rate in order to make higher subsidy payments. It is not clear (not to say 220This cyclicality affects housing supply. After a downturn in housing supply in 1989­90, there has been a relative boom until 1997­98, when reduced supply by both government and private sector took place (see documents of the Third FYDP in Housing Sector, Report No. 1, Assessment of First and Second FYDP. It claims that a boom started in 1991 with increased production by the public sector, continued in 1995­96 by the private sector.) 221The Management and Planning Organization (MPO) estimated unemployment as 14.3 percent for 2000­01 and 13.8 percent for 2001­02. 222Therefore, estimations of multiplier effects of government spending will not overestimate the stimulus and on the contrary, lead to acceptable results. 223Accelerating liquidity growth (M2) confirms that there are strong domestic inflationary pressures driven mainly by bank lending to the public sector, in particular loss-making state-owned enterprises (SOEs). The Economist Intelligence Unit deems this to be partly offset by bond issues (both by the government itself and by quasi-state enterprises). These issues have become attractive to Iranians, as they offer an annual 17 percent over a four-year term. 224Country Report Iran, The Economist Intelligence Unit, 2002. 225Local estimates suggest that US$5billion worth of goods are purchased at a fixed rate; thus Iran effectively will purchase circa 30 percent of all imported goods and 20 percent of their local currency cost at market exchange rates. It is said that some SOEs and bonyads have dollar-denominated debt with Bank Markazi, which they contracted and currently service at the overvalued official rate and which they will be unable to fund if all transactions are conducted at the market rate. It is also quite likely that other firms (e.g., in the construction materials sectors) purchase goods and raw materials at heavily subsidized prices through the overvalued official rate, and would be forced to drastically increase prices when unification occurs. Iran--Strategies for the Housing Sector Annexes ­ Chapter 1 somewhat contradictory) how this compares with the plans to replace subsidies with targeted welfare. In general, use of the Tehran Stock Exchange (TSE) rate introduced in 1995 has risen dramatically. The rate is relatively stable as of mid-2001 at close to IRR 8,000/US$ (mainly due to the rate management by Bank Markazi through the supply of oil-revenue foreign exchange to the market). Despite this, informal evidence suggests that the black market continues to pursue operations in hard currencies. 165 Iran- Strategies for the Housing Sector Annexes ­ Chapter 2 ANNEXES ­ CHAPTER 2 Iran--Strategies for the Housing Sector Annexes ­ Chapter 2 Table A2-3. Allocation of Public Land for Residential Use Year Area of Residential public Total area supplied Share of total land supplied (1000 m2) (1000 m2) land (%) 1971-72 0 NA 0.00 1972-73 0 NA 0.00 1973-74 0 NA 0.00 1974-75 0 NA 0.00 1975-76 300 3,000,000 0.01 1976-77 900 4,500,000 0.02 1977-78 500 1,250,000 0.04 1978-79 1,000 1,666,667 0.06 1979-80 20 40,000 0.05 1980-81 2,500 416,667 0.60 1981-82 9,200 34,074 27.00 1982-83 2,300 28,750 8.00 1983-84 15,400 29,057 53.00 1984-85 22,800 45,600 50.00 1985-86 17,300 38,444 45.00 1986-87 15,600 32,500 48.00 1987-88 12,300 24,600 50.00 1988-89 10,000 20,000 50.00 1989-90 13,200 20,625 64.00 1990-91 17,400 20,471 85.00 1991-92 28,700 34,167 84.00 1992-93 28,700 34,167 84.00 1993-94 43,300 81,698 53.00 1994-95 18,300 35,882 51.00 1995-96 25,200 27,391 92.00 1996-97 18,800 31,333 60.00 1997-98 13,200 28,696 46.00 1998-99 8,990 42,810 21.00 1999-00 11,273 2000-01 14,122 2001-02 5,711 Source: MHUD Database 167 Iran--Strategies for the Housing Sector Annexes ­ Chapter 2 Table A2-4. Revenue from Total Public Land Allocation Year Allocation (1000 m2) Revenue (Rls 1,000) Revenue (Rls/m2) 1979/80 18 2,587,015 143,723 1980/81 4,666 2,587,015 554 1981/82 10,930 2,587,015 237 1982/83 3,110 2,587,015 832 1983/84 20,898 13,292,289 636 1984/85 26,114 14,718,087 564 1985/86 20,941 19,068,615 911 1986/87 19,495 14,617,440 750 1987/88 18,027 15,524,883 861 1988/89 16,777 15,900,425 948 1989/90 15,702 19,957,422 1,271 1990/91 31,231 32,862,338 1,052 1991/92 55,799 43,413,640 778 1992/93 88,903 61,264,870 689 1993/94 78,456 82,453,332 1,051 1994/95 42,092 61,459,319 1,460 1995/96 49,261 197,888,260 4,017 1996/97 69,347 223,814,084 3,227 1997/98 28,346 146,707,316 5,176 1998/99 31,841 262,446,301 8,242 1999/00 44,665 366,798,514 8,212 2000/01 60,920 408,670,598 6,708 Total 737,539 2,009,205,593 2,724 Source: MHUD, NLHO Database 168 Iran--Strategies for the Housing Sector Annexes ­ Chapter 2 Table A2-5. Characteristics of the cost of completed buildings in urban areas Year Land area Floor area Total cost Total cost of Cost per m˛ Cost per floor Cost per Share of (1,000 m2) (1,000 m2) of land floor area (IRR of land area unit (IRR land in million) (1,000 IRR) (1,000 IRR) million) total cost 1971-72 11,482 9,871 22,964 40,471 2 4.1 0.8 36 1972-73 13,012 10,629 28,626 46,767 2.2 4.4 0.9 37 1973-74 14,553 11,680 30,561 50,224 2.1 4.3 0.96 38 1974-75 14,463 11,910 33,264 58,359 2.3 4.9 1.14 36.3 1975-76 17,468 14,951 66,378 106,152 3.8 7.1 1.79 38.4 1976-77 17,824 16,114 126,550 153,083 7.1 9.5 2.7 45.2 1977-78 19,317 18,851 160,331 222,441 8.3 11.8 3.2 41.8 1978-79 23,305 20,984 153,813 264,398 6.6 12.6 2.7 36.7 1979-80 2,606 24,686 99,028 328,323 3.8 13.3 2.6 23 1980-81 23,876 25,782 126,872 342,109 3.8 18 2.602 27 1981-82 26,370 19,515 124,714 302,438 4.7 22 3.27 29.2 1982-83 22,994 16,654 161,780 320,194 7 29 3.67 33.5 1983-84 21,065 14,760 271,210 396,995 12.8 45 6.381 40.5 1984-85 29,192 20,991 451,827 596,012 15.4 50 6.986 43 1985-86 36,012 25,769 576,192 1,314,219 16 51 11.6 30.4 1986-87 33,762 23,763 513,182 1,235,676 15.2 52 12 29.3 1987-88 31,797 22,250 458,345 715,257 14.4 53 880 39 1988-89 26,284 19,814 479,035 752,886 18.2 62 9.57 39 1989-90 22,132 17,810 542,936 799,144 24.5 75 11.707 40.4 1990-91 17,098 14,640 653,371 869,923 38.2 104 16.325 42.8 1991-92 23,375 22,309 2,163,382 1,802,989 92.5 178 26.685 54.5 1992-93 27,482 26,333 3,129,613 2,685,971 113.8 222 31.923 54 1993-94 27,732 26,539 3,140,974 3,916,959 113.2 266 39.434 45 1994-95 28,772 27,578 3,031,800 3,702,973 128.7 244 33.451 46 1995-96 27,583 29,379 524,440 5,076,587 188.6 251 49.182 51 1996-97 32,146 29,929 7,585,921 7,929,806 236 265 75.8 49 1997-98 76,752 193,641 9,080,830 8,814,622 118.3 115 92.4 51 1998-99 37,036 30,425 9,037,891 12,618,320 244 414 102.6 42 1999-00 34,144 2000-01 39,257 Source: Central Bank and Statistical Center of Iran 169 Iran--Strategies for the Housing Sector Annexes ­ Chapter 2 Table A2-6. Land Allocation Period Year Total Non-residential transfer Total residential transfer Developers Housing Cooperatives Individuals m2 m2 plot m2 Unit plot m2 unit plot m2 unit plot m2 unit plot First decade 79/0 18,400 0 0 18,400 61 61 0 0 0 0 0 0 18,400 61 61 of revolution 80/1 4,665,300 2,109,900 2,794 2,555,400 9,792 9,792 0 0 0 88,000 388 388 2,467,400 9,404 9,404 81/2 10,930,650 1,723,450 695 9,207,200 28,166 28,166 100,000 256 256 3,410,000 9,339 9,339 5,697,200 18,571 18,571 82/3 3,111,440 797,000 279 2,314,440 9,147 9,140 151,000 474 474 858,000 3,864 3,864 1,305,440 4,809 4,802 83/4 20,897,650 5,493,750 1,001 15,403,900 57,253 57,253 2,669,600 8,858 8,858 4,219,200 16,535 16,535 8,515,100 31,860 31,860 84/5 26,114,750 3,265,550 1,367 22,849,200 89,343 89,343 2,956,800 8,477 8,477 7,581,200 35,273 35,273 12,311,200 45,593 45,593 85/6 20,941,250 3,630,050 896 17,311,200 69,902 69,902 2,523,600 8,508 8,508 5,423,000 25,323 25,323 9,364,600 36,071 36,071 86/7 19,495,550 3,907,100 801 15,588,450 62,405 62,405 2,804,250 11,742 11,742 3,997,800 17,063 17,063 8,786,400 33,600 33,600 87/8 18,027,400 5,559,000 804 12,468,400 53,053 53,053 2,275,000 9,874 9,874 2,753,800 12,720 12,720 7,439,600 30,459 30,459 88/9 16,777,550 6,673,250 840 10,104,300 43,600 43,600 2,028,000 9,424 9,424 2,309,250 10,217 10,217 5,767,050 23,959 23,959 Total 140,979,940 33,159,050 9,477 107,820,890 422,722 422,715 15,508,250 57,613 57,613 30,640,250 130,722 130,722 61,672,390 234,387 234,380 First 89/0 15,702,464 4,134,197 694 11,568,267 52,847 52,833 2,634,025 12,718 12,718 2,595,433 13,136 13,122 6,338,809 26,993 26,993 development program 90/1 31,232,320 13,816,662 1,498 17,415,658 84,127 62,321 5,740,213 32,092 16,084 3,785,514 17,990 12,761 7,889,931 34,045 33,476 91/2 55,800,101 27,131,181 2,612 28,668,920 146,274 85,363 10,965,091 67,097 19,036 4,990,929 23,611 14,502 12,712,900 55,566 51,825 92/3 88,689,389 43,536,780 4,147 45,152,609 205,527 126,044 14,243,436 73,831 18,682 9,098,329 42,493 31,021 21,810,844 89,203 76,341 93/4 78,456,815 35,148,728 3,775 43,308,087 181,226 108,367 15,749,388 60,860 12,473 10,011,196 42,407 31,444 17,547,503 77,959 64,450 Total 269,881,089 123,767,548 12,726 146,113,541 670,001 434,928 49,332,153 246,598 78,993 30,481,401 139,637 102,850 66,299,987 283,766 253,085 Second 94/5 42,094,347 23,723,829 2,610 18,370,518 94,519 63,059 2,608,396 16,328 5,875 3,585,954 22,374 8,499 12,176,168 55,817 48,685 development program 95/6 49,261,812 23,991,904 6,113 25,269,908 120,701 70,543 10,141,265 48,497 13,031 3,829,055 21,432 12,050 11,299,588 50,772 45,462 96/7 69,346,606 50,520,491 3,933 18,826,115 85,244 61,896 6,134,758 33,297 15,998 2,551,827 11,331 8,334 10,139,530 40,616 37,564 97/8 27,169,434 13,947,588 2,130 13,221,846 64,788 42,774 1,813,412 14,289 5,495 2,499,430 13,753 6,270 8,909,004 36,746 31,009 98/9 29,036,875 20,048,493 1,903 8,988,382 41,022 29,967 557,235 4,967 1,868 1,284,694 6,342 3,446 7,146,453 29,713 24,653 Total 215,316,901 130,640,132 16,208 84,676,769 406,274 268,239 21,255,066 117,378 42,267 13,750,960 75,232 38,599 49,670,743 213,664 187,373 Third 99/0 43,426,818 32,153,322 1,963 11,273,496 44,863 29,388 1,485,338 11,001 3,836 2,942,695 6,973 1,537 6,845,463 26,889 24,015 00/1 35,823,044 21,701,254 1,973 14,121,790 39,676 25,863 1,844,609 8,683 2,616 1,981,450 8,849 5,806 10,295,731 22,144 17,441 01/2 51,165,769 45,454,408 1,968 5,711,361 8,956 Total 130,415,631 99,308,984 5,904 31,106,647 84,539 64,207 3,329,947 19,684 6,452 4,924,145 15,822 7,343 17,141,194 49,033 41,456 Total 756,593,561 386,875,714 44,315 369,717,847 1,583,536 1,190,089 89,425,416 441,273 185,325 79,796,756 361,413 279,514 194,784,314 780,850 716,294 Source: MHUD, NLHO Database 170 Iran--Strategies for the Housing Sector Annexes ­ Chapter 2 Table A2-7. Land Acquisition Period Year Total Purchased Land Public Land Mavat Land (National land) m2 Plots m2 Plots m2 Plots M2 Plots First decade 79/0 2,904,000 714 0 0 15,000 4 2,889,000 710 of revolution 80/1 24,889,000 5,031 0 0 890,000 424 23,999,000 4,607 81/2 11,761,800 2,054 0 0 1,234,000 155 10,527,800 1,899 82/3 43,668,700 559 1,323,800 54 29,365,000 132 12,979,900 373 83/4 142,030,800 6,996 24,801,000 2,245 52,773,800 1,340 64,456,000 2,411 84/5 172,113,287 5,787 13,638,900 3,211 86,225,450 748 72,248,937 2,828 85/6 75,284,700 9,864 14,785,450 3,674 28,433,800 2,525 32,065,450 3,665 86/7 202,903,700 4,909 24,328,900 1,493 85,991,350 556 92,583,450 2,860 87/8 76,528,450 3,912 8,630,000 1,584 43,815,000 285 24,083,450 2,043 88/9 113,028,450 2,359 1,017,450 357 89,484,000 228 22,527,000 1,774 Total 865,112,887 42,185 88,525,500 12,618 418,227,400 6,397 358,359,987 23,170 First 89/0 270,447,387 3,416 7,246,000 538 109,927,000 276 153,274,387 2,602 development 90/1 411,371,801 5,519 39,628,622 1,656 311,916,535 624 59,826,644 3,239 program 91/2 1,411,624,326 13,645 74,871,729 7,643 1,093,453,275 1,519 243,299,322 4,483 92/3 925,834,874 9,879 222,105,812 4,972 457,661,496 1,168 246,067,566 3,739 93/4 844,932,879 4,403 21,559,184 825 346,386,066 950 476,987,629 2,628 Total 3,864,211,267 36,862 365,411,347 15,634 2,319,344,372 4,537 1,179,455,548 16,691 Second 94/5 264,085,749 2,923 11,048,210 387 122,517,275 804 130,520,264 1,732 development 95/6 292,635,806 3,170 8,692,907 848 150,565,421 817 133,377,478 1,505 program 96/7 585,160,167 4,800 9,646,675 2,494 428,401,793 520 147,111,699 1,786 97/8 231,952,182 2,218 3,400,435 651 170,049,196 273 58,502,551 1,294 98/9 184,628,435 1,467 3,755,408 412 126,113,402 289 54,759,625 766 Total 1,558,462,339 14,578 36,543,635 4,792 997,647,087 2,703 524,271,617 7,083 Third 99/0 267,463,081 1,813 3,043,144 393 196,872,524 756 67,547,413 664 developme Item m2 plot m2 plot Between city limits and Within City Limits nt program Periphery (m2) (m2) 00/1 261,346,360 1,142,469 185,634,492 74,569,399 01/2 312,792,493 274,832,071 37,960,422 171 Iran--Strategies for the Housing Sector Annexes ­ Chapter 2 Period Year Total Purchased Land Public Land Mavat Land (National land) m2 Plots m2 Plots m2 Plots M2 Plots Total 841,601,934 1,813 4,185,613 393 657,339,087 756 180,077,234 664 Total 7,129,388,427 95,438 494,666,095 33,437 4,392,557,946 14,393 2,242,164,386 47,608 Source:MHUD, NLHO Database 172 Iran--Strategies for the Housing Sector Annexes ­ Chapter 2 Table A2-8. Distribution of urban land allocation by type of allocation (in percentages) Period of time Individual Cooperative Builders Total 1979­1989 55 31 14 100 First Development Plan (1988­94) 42 21 37 100 Second Development Plan (1994­99) 59 16 25 100 Third Development Plan (1999­2001) 67 19 14 100 1979­02 53 22 25 100 Source: Estimated with data provided by NLHO. Table A2-9. Share of Housing Cost and Transport Cost in Total Urban Household Expenditures (IRR Thousands) Average 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 Decile 1374 Total Expenditure 9,417.80 1,798.40 3,282.90 4,293.80 5,276.40 6,378.80 7,565.40 9,046.70 11,109.00 14,533.90 28,129.90 1995/6 Housing Cost 2,703.80 759.50 1,227.40 1,537.30 1,859.20 2,125.10 2,438.60 2,868.50 3,388.00 4,071.40 6,105.20 Transport Cost 870.50 49.50 102.60 145.80 202.30 232.80 303.90 380.00 566.90 931.20 5,338.50 Share (%) 37.90 44.90 40.50 39.10 39.00 36.90 36.20 35.90 35.60 34.40 40.60 1379 Total Expenditure 25,305.10 4,941.80 8,721.20 11,473.50 14,082.70 16,654.80 19,569.40 23,344.20 28,557.10 37,497.80 74,579.20 2000/1 Housing Cost 7,605.30 2,251.90 3,588.00 4,366.30 5,135.70 5,888.10 6,530.00 7,692.30 9,163.10 11,088.60 17,212.40 Transport Cost 2,639.00 141.90 260.30 388.60 560.90 666.50 918.50 1,100.50 1,593.80 2,430.40 15,754.80 Share (%) 40.50 48.40 44.10 41.40 40.50 39.40 38.10 37.70 37.70 36.00 44.20 Source: 1995/96 and 2000/01 Urban Household Survey, Statistical Center of Iran 173 Iran- Strategies for the Housing Sector Annexes ­ Chapter 2 Table A2-10. NHLO Activities in Land in the 6 Largest Cities (1995-2002)* Acquisition (m2) Allocation (m2) Year Purchased Between Urban Within Urban Total Non-residential Residential Limit & Periphery Limit 1995-96 490,252 3,423,830 7,036,926 6,468,723 3,251,421 3,217,302 1996-97 1,722,497 37,021,648 8,412,108 22,936,725 18,754,345 4,182,380 1997-98 735,152 11,149,756 7,609,979 3,438,374 750,082 2,688,292 1998-99 764,099 8,098,551 9,118,243 4,411,678 2,198,308 2,213,370 1999-00 1,240,155 709,374 7,423,140 2,013,231 316,869 1,696,362 2000-01 0 7,375,167 507,520 5,486,783 2,064,608 3,422,175 2001-02 0 15,222,718 10,947,472 21,791,326 19,913,251 1,878,075 Total 4,952,155 83,001,044 51,055,388 66,546,840 47,248,884 19,297,956 *Largest cities are Tehran, Tabriz, Ahwaz, Shiraz, Mashad, Esfahan Source: MHUD, NHLO Database Iran- Strategies for the Housing Sector Annexes ­ Chapter 3 ANNEXES ­ CHAPTER 3 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.1. Description of Housing Programs in Iran Program Description Eligibility Government involvement Sizec Savings program Potential borrowers place deposit in the Bank Anybody Housing Bank receives favorable Total savings as of Regular Maskan at 0 interest and for every period of reserve requirements and end 2001 are Housing savings (5 to 6 months) the ratio of the loan provision of additional liquidity IRR9,486 billion Savings Fund amount to the savings is increased by 1 up to from the Central Bank on (US$1.2 billion)a, in maximum of 7 times savings. Maximum loan favorable terms. 1999 IRR623.5 amount is IRR25­50 million (US$3,125­6,250) billion (US$78 for 12­18 years at below market interest rates: million) were issued in loansb. Loans are granted for construction or purchase of newly constructed housing (first transfer of Since 1996/97 ownership). government had allocated in the order Youth Housing Additional benefits: Anybody older than Interest rate subsidies: of IRR260 billion Saving scheme additional 2 percent subsidy on interest rate; 18 interest rate caps at below market (US$32.5 million) maximum loan period is 20 years. rates (implicit) per year for additional interest rate subsidies additional deposits of 2 percent to youth housing for government savings scheme and up to 4 employees and percent for public servants and military.b military scheme (explicit). For Public Additional benefits: Employees of Government provides additional Servants and up to 4 percent interest rate deduction on IRR15 ministries and public deposit for public servants and Guardians million (US$1,875) depending on the period of institutions, budgets military scheme (the exact savings; of which are mechanism is not clear). loan to savings ratio is higher than for others included in the (7.5 or 10 vs. 7); government budget, Operated by maximum loan period is 20 years; staff of armed and Housing Bank purchase of any housing; law enforcement government matching deposits of 50 percent of forces who have Since 1990 savings up to IRR2.5 million per period worked resident at 176 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Program Description Eligibility Government involvement Sizec (US$312) The exact mechanism needs to be least 2 years determined. Ghadir Low-income housing built for and sold to Targeted groups in Under direct government contract Government funds-- Project targeted groups.d Part of the payment is made accordance with or joint venture, the government RI33 billion (US$4 up-front and part is made via installments (rent- priority of the score provides public land at "regional million) in 1999/00, Administered to-own). price," which is estimated to be 95 billion (US$12 by the about 10 percent of its actual million) in 2000/01b, government Loans are provided by Bank Refah. Maximum value. 120 billion (US$15 through Bank loan amount is IRR30 million (US$3,750) for million) in 2001/02, Refah 15­20 years at 15 percent interest without Government provides additional and additional savings account. funds to be on-lent to the eligible IRR180 billion Since 1999/00 borrowers by Refah Bank at (US$22.5 million) Limited size housing built either via direct subsidized rents. The government planned for 2002/03 government contracts, joint venture, or solely by portion of the loan is repaid in private sector under government supervision. 15­20 years. Bank Refah funds-- RI12.6 billion Government compensates Bank (US$1.6 million) in Refah for administration of the 1999/00, 168 billion loans by 1 percent up-front fee. (US$21 million) in 2000/01b, and 160 Interest rate subsidies: billion (US$20 interest rate caps at below market million) in 2001/02 rates (implicit); additional explicit interest rate As of the end of subsidies of 4 percent (up to 12 2000/01 8,520 units percent in total) for meeting the or 296,064 m2 have following criteria - use of energy been built . b efficiency measures, use of innovative technologies, sale of units under RTO scheme Different targeted groups receive additional subsidies in accordance with their eligibility. Non-Ghadir Housing built and sold via installments (Rent-to- n/a Government provides land at 13,157 housing units RTO program Own). below market price and interest or 1.2 million m2 b 177 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Program Description Eligibility Government involvement Sizec rate subsidies: have been built.b Operated by Loans are granted by Housing Bank via savings interest rate caps at below market NHLO through program at below market interest rates. rates (implicit); Housing Bank, Maximum loan amount is IRR30­50 million additional interest rate subsidies (US$3,750­6,250). of 6­8 percent (explicit). Since 1999/00 Other subsidies to targeted groups as they are eligible. Program for Housing loans to teachers at subsidized interest Teachers 10 percent interest rate subsidies, In accordance with teachers rates. i.e. final interest rate is 5­9 NHLO there are percent. about 180,000 households receiving such subsidies. Program for BM provides technical assistance (prepares Households with Government funds BM's TA and deprived technical drawings and supervises construction) inadequate-quality administrative activities by 14.57 to the deprived and grants loans on behalf of the shelter percent administration fee and Operated by the government. provides funding for loans with 8 government percent interest rate subsidy; i.e., through Loans are granted at subsidized interest rates and interest rate is 9­11 percent Bonyad the maximum loan amount is IRR20 million Maskan (BM) (US$2,500). Program for Subsidized housing loans and technical Government funds BM's TA and Construction / rural housing assistance (prepares technical drawings, administrative activities by 14.57 reconstruction of nominates the applicant to the bank and percent administration fee and 900,000 housing Operated by the supervises construction) for households in rural provides funding for loans at unitse (355 thousand government areas. subsidized rates of 12­14 percent units during the through b period of 1996­2000 Bonyad Loans are granted at subsidized interest rates and b) Maskan (BM) the maximum loan amount is IRR20 million (US$2,500). Lending bank is every year nominated by the Central Bank. Post-disaster BM provides technical assistance (supervises Households affected Government funds BM's TA and As of the end of program construction) to those affected by any type of by any type of administrative activities by 14.57 2000/01 in total disaster and grants loans on behalf of the disaster. percent administration fee and 16,340 housing units 178 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Program Description Eligibility Government involvement Sizec Operated by the government. Often construction is carried out by provides funding for loans at have been government people themselves. subsidized rates of 12­14 percent. completed, 35,596 through b are under Bonyad Loans are granted at subsidized interest rates and construction, repairs Maskan (BM) the maximum loan amount is IRR20 million of 36,498 have been (US$2,500). Lending bank nominated every year completed and by the Central Bank. 21,078 are in progress.f BM also provides construction materials at lower cost than in the specific region affected by the disaster due to procurement in non-affected areas, where prices are lower, and in large amounts. Housing for IKRC provides different services to Students, large Government provides partial In 2001/02 poor approximately 1 million households in targeted families, disabled, funds at zero interest rate that are government social groups, including health services, cultural women headed and repayable only when and if the provided IRR170.5 Operated by the activities, employment loans, provision of low income household is able to do so. billion (US$ 21 Imam housing. households million). Khomeini Relief IKRC builds limited-size housing (35­65 m2 Committee costing IRR20 million­US$2,500), and provides (IKRC) loans for self-construction and maintenance of housing. These loans are at zero interest and not repayable until household is able to do so. New towns Government mainly provides Government has infrastructure. It also provides allocated 15,476 ha land to co-operatives for housing of land for housing construction. Direct government constructionb construction of housing takes place at a rather small scale. Public rental Public rental housing provided at below market Public servants, Government provides public As of the end of housing rents. Usually this housing is rented for about 5 public workers, rental housing. 1999/00 193,934 years before the tenant gains right to purchase teachers, military housing units or 20.5 the unit. personnel million m2 were provided as housing 179 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Program Description Eligibility Government involvement Sizec against service by the government b Funds Funds are established by Banks (Teachers-- Young households, Government provides land at So far only the Melli, Refah,Sepah), NHLO and construction Teachers, subsidized price, 10,000 Youth and Workers' Youth companies. Guardians, unfinished housing units and Funds have started Teachers Workers IRR15 million (US$1,875) per their operations and Guardian Government allocated 40,000 unfinished housing unit at subsidized interest 3323 out of 8828 Workers housing units (10,000 per fund) to be finished Additional rates for new construction. constructed units and allocated by the funds to the eligible requirements: have been allocated Administered households via deferred payment scheme. --no prior land nor Interest rate subsidies of 4 b. by the housing ownership percent for meeting each of the participating After finishing these units, funds would build --residents in the following criteria: construction new housing, funded by government (RI15 area for 10 years the three criteria under Ghadir companies million­US$1,875 ­ per housing unit at project and discounted interest rates), participating bank construction in old Since 2000/01 (RI20 million­US$2,500--per housing unit at neighborhoods 16 percent interest rate caps) and construction company (the remaining part). New housing Ministry of Housing and the Central Bank are TBD TBD fund currently working on development of a new housing fund. The fund would support mass In preparation production of limited size housing, rental housing, and renovation of housing in rural areas and for low-income households. It would also support the four already existing funds--Youth, Workers, Teachers, and Guardians. The fund would be established by equal contributions from the Central Bank and commercial and specialized banks (RI1 billion­US$125,000­ each), a contribution from Bonyad Maskan, and a non-cash contribution from the Ministry of Housing. The exact mechanism of the fund's operations has not been determined. 180 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Program Description Eligibility Government involvement Sizec Program for Cooperatives can be established by employees Government allocates public land Total allocated land cooperatives of one enterprise for the purposes of housing for construction of housing. as of the end of construction. 2000/01 is 1,852 ha Co-operatives are also eligible for or 10 percent of total other subsidies such as those land allocated by the provided for developers, if the NHLO. eligibility requirements are met. Program with Bonyad Shahid builds housing on the land Provide land at regional price, As of the end of Bonyad allocated by NHLO and allocates it to martyrs which is expected to be 10 2000/01 in total 374 Shahid (the exact mechanism and terms of allocation percent of its market value. ha of public land was need to be determined). allocated Notes: ­ Housing Bank supervision; ­ World Bank estimates based on consultants reports. ; ­ For detailed data see Annex 3.2 below; ­ Special groups (martyrs, prisoners of war, and a b c d disabled veterans), low income, women headed and young households--in accordance with priority determined using scoring mechanism; ­ Bonyad Mascan; ­ Statistical Year Book of e f 2000­01 Source: Compiled by the World Bank based on interviews with Government. 181 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.2. Statistical Data on Government Housing Programs Table A3-10. Savings Program 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Total amount of housing savings accounts (RI m) 1,435,600 2,379,400 4,032,900 5,450,400 6,511,000 8,495,300 Of which: 404,700 603,300 704,900 698,400 665,300 - government employees and military 104,700 654,900 - youth 246,600 Government funds for additional deposit for 101,000 275,000 259,000 259,000 259,000 259,000 government employees and military Source: World Bank estimates based on consultants reports using various sources from Central Bank, Ministry of Finance and Economy, and MHUD Upgrading Programs Table A3-11. Summary of RTO Schemes Ghadir Project Non-Ghadir RTO program 1999/00 2000/01 1999/00 2000/01 Number of housing units planned 17,000 38,000 8,016 11,000 Number of housing units built 2,184 6,336 4,017 9,140 Total area of housing built (m2) 75,900 220,164 361,530 822,600 Of which (of housing units): - government contracts - joint venture - private 2,184 6,336 4,017 9,140 Total costs (RI million) 1,855 187,139 307,400 699,210 Of which (RI m): - government contracts - joint venture - private 1,855 187,139 Total area of land allocated (ha) 79,311 296,771 176,740 403,451 Total loans granted (RI m) 76,400 221,700 140,595 319,900 Of which (RI m) - government funds 43,800 95,600 - Bank Refah 32,600 126,000 Notes: (a) This number appears to be incorrect Source: World Bank estimates based on consultants reports using NHLO database 182 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-12. Program for Rural Housing 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Number of housing units built / reconstructed 64,618 79,666 83,338 61,158 43,589 22,640 Of which: 64,618 79,666 83,338 61,158 43,589 22,640 - with government funds - private funds Total costs (RI m) 192,500 385,000 821,000 430,000 407,000 Na Of which (RI m): 192,500 385,000 821,000 430,000 407,000 Na - government funds - private funds Total amount of new loans granted (RI m) 52,120 21,300 Source: World Bank estimates based on consultants reports using information from Bonyad Mskan Table A3-13. Post-disaster Project 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Number of housing units built / reconstructed 42,500 65,000 67,000 42,604 30,533 11,652 Of which: 42,500 65,000 67,000 42,604 30,533 11,652 - with government funds - private funds Total costs (RI m) 485,000 270,000 295,000 231,000 172,000 Na Of which (RI m): 485,000 270,000 295,000 231,000 172,000 - government funds - private funds Source: World Bank estimates based on consultants reports using information from Bonyad Maskan Table A3-14. New towns project 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Total Total since inception Land allocated for housing construction (ha) 249 269 145 165 132 Na 960 15,476 Source: World Bank estimates based on consultants reports using NHLO Database 183 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-15. Public rental housing 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Number of housing units 170,000 175,810 181,160 190,330 193,934 Na Total area of housing units (m2) 188,700,000 19,163,290 19,202,960 20,174,980 120,537,610a na Average rent (RI / m2) 500 560 1,500 1,500 Na Na Cost of maintenance (RI m) 1,650 1,960 19,000 14,525 13,495 17,854 Notes: (a) Seems inconsistent Source: Planning and Management Organization Table A3-16. Housing Funds (Beginning 2002) Youth Workers Teachers Warriors Total number of units of constructed housing 5,916 2,912 3,450 5,481 Total area of units of constructed housing 354,960 174,720 207,000 328,860 Total number of units of allocated housing 3,191 132 0 0 Total area of units of allocated housing 191,460 Total amount of issued loans (RI m) 59,160 29,120 34,500 54,810 Of which (RI m): - government funds 85,190 41,933 49,920 78,960 - bank funds 59,160 29,120 34,500 54,810 - Fund's own resources 139,618 68,723 81,980 129,430 Source: The respective fund from MHUD and Ministry of Education Table A3-17. Co-operatives 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Total Total since inception Allocated public land (ha)* 255 249 128 294 187 na 1,133 7,860 Other assistance (RI m) 3,300 2,400 1,900 2,150 na na 9,750 Na Source: MHUD, NLHO Database. (*) Taksam 184 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-18. Bonyad Shahid 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Total Total since inception Allocated public land (ha)* 145 21 15 14 10 8 213 Na Other assistance (RI m) 1,700 19,705 26,500 23,000 7,000 na 77,905 Na Source: * - Taksam, Bonyad Shahid Table A3-19. Government compensations for administration of different programs 1995/96 1996/97 1997/98 1998/99 1999/00 Bonyad Maskan 4,560 3,525 3,309 7,712 31,614 Source: World Bank estimates based on consultants reports. 185 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.3. Description of Housing Subsidies to Various Beneficiaries Interest Rate Subsidies to Developers If the average size of housing units in the project built by the developer is within the limits (75 m2 in the five largest cities and 100 m2 elsewhere), it is eligible for interest-rate subsidies of 6 percent, if the number of housing units in the project is less than 10, and 8 percent, if the number of units is 10 or more. This subsidy is available for 18 months, after which interest rates increase to 24­25 percent. Under the Ghadir Project and the four funds' programs (Youth, Workers, Teachers, and Guardian) developers are eligible for 4 percent subsidies to meet any of the following requirements up to a total subsidy of 12 percent that is passed on to the buyers of the units: (a) developer agrees to sell units under RTO scheme; (b) developer applies energy efficiency measures; (c) developer applies innovative technologies that reduce built area. Under the four funds' program (Youth, Workers, Teachers, and Guardian) an additional 4-percent subsidy is available to those developers who carry out such construction in the old neighborhoods. These interest rate subsidies are available or passed over to those buyers who buy units under the RTO scheme. Subsidies to Specific Social Groups The following table provides a summary of the types of subsidies available to different social groups in Iran. Eligible recipients Types of assistance Group 1--martyrs, - Ghadir Project; prisoners of war, and - housing loans at 4 percent interest rate, 20 years maturity, disabled veterans (Special maximum amount is IRR50 million (US$ 6,250); Groups) - 100 percent discount on land development costs that on average are assessed to be IRR5 million (US$ 625) per housing unit; - Land sold at a price of 1980 that is assessed to be close to zero at current market value. Group 2--young families, - Ghadir Project; low-income households, - land sold at regional price that is assessed to be 10 percent of the women-headed households current market value. Group 3--public servants - loans for both--existing and new housing; - additional loans from public funding in the amount of 50 percent of the person's savings so that the loan amount could be increased to 1:2.5 rather than 1:2 (the exact mechanism is not clear); - for every period the deposit is kept (1 period = 5 months) the person gets additional interest rate subsidy of 1 percent up to 4 percent in total; 186 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Eligible recipients Types of assistance - public rental housing at below market rents; - income tax subsidies--whole housing loan installment is tax exempt Group 4--public workers - public housing at below market rents. - Workers Fund Group 5--teachers - interest rate subsidies of 10 percent; - public housing at below market rents. - Teachers Fund Group 6--guardians - Guardian Fund Group 7--disaster victim - reconstruction loans at 8 percent interest rates; - technical assistance (technical drawing for and supervision of the reconstruction) from Housing Foundation (financed by the government) for reconstruction of housing; - construction materials at below market prices (provided by HF). Group 8--rural housing - reconstruction loans at 8 percent interest rates; - technical assistance (technical drawing for and supervision of the reconstruction) from Housing Foundation (financed by the government) for reconstruction of housing. Notes: (a) Low income for 2001­02 is set at IRR570,000 per month per household. Source: World Bank estimates based on consultants reports. 187 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.4. Scoring Parameter Maximum Weight Note score (percent) Young family 5 16 For every additional two years up to 10 years, 1 point is subtracte Woman-headed household 4 13 Families with 1­3 children 3 10 For every additional child 1 point is subtracted Public servants and workers - 4 13 0.5 point for each year of membership membership in co-operative Holder of housing savings 3 10 0.5 point for each period of savings (5 account months) Resident in the area 5 16 1 point for every three years Special Groups 2 6 Low-income household--in 5 16 1 point subtracted for each additional IRR 2001/02 IRR570,000 (US$71) 50,000 (US$6,250) per month TOTAL 31 100 Source: World Bank estimates based on consultants reports. 188 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.5. Housing Foundation (Bonyad' Maskan) The Housing Foundation (HF) is a holding company with representative offices in different provinces. The foundation promotes: · Rural development; · Provision of financial aid for rural housing; · Housing renovation under post-disaster program. It provides technical assistance in the form of technical drawings, supervises construction/reconstruction, administers loans granted at 8 percent interest rates, provides construction materials produced by their subsidiary companies at below-market prices, and allocates housing. HF also allocates land. It is not clear, however, whether it is public land or that of the HF and what the allocation terms are. These activities are mainly funded by the government, which pays a 14 percent annual fee to the HF. HF has four subsidiary companies in construction (TOSE-E), machinery building, construction materials, and environmental production. Each of these companies has further subsidiaries. TOSE-E has 11 subsidiaries, 10 of which are construction companies; one is a technical consulting company. All subsidiaries are separately incorporated companies. These companies work country wide (in 24 out of 28 provinces).TOSE-E builds 2,000 to 3,000 housing units a year. It has built 6,700 housing units for low-income and deprived households, 5,640 of which have been sold under RTO scheme. HF builds housing for deprived households in rural areas, mostly those that have inadequate housing. Housing is provided at cost--50 percent downpayment and 50 percent in installments over 10 years. Currently 10,000 housing units are under construction. As of October 2001, HF had built 60,000 housing units and implemented about 5,000 rural master plans. About 900,000 housing units had been constructed or reconstructed in rural areas; 40,000 of these were for deprived households. HF has allocated 290,000 land plots in rural areas and granted 300,000 loans as of October 2001. HF does not have any data on income of beneficiaries; however, it estimated that they could reach as low as the fourth decile. 189 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.6. Housing-Related Government Budget Table A3-20. Total government expenditures on housing--capital and operating costs (RI b) 1995/96 1996/97 1997/98 1998/99 1999/00a 2000/01 2001/02 Central government 287 484 469 346 570 635 312 Local governments 187 296 237 89 75 Total 474 780 706 435 688 a. budgeted Note: Due to differences in sources and definitions, there are inconsistencies between Tables 3.20, 3.21, 3.22 and 3.23. Source: Statistical Year Book 190 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-21. Government budget allocations for housing (RI b) Type of expenditure 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Home loan to the ex-prisoners of war - - - - - 7.5 Home loan to imposed war refugees 3.5 2.8 3.4 5 Housing for the Friday-prayer leaders (Imam Jomeh) 8 Housing for the Members of Parliament 12 12 16.3 12.1 Home loan for the Law Enforcement Forces personnel 1 25 45.5 91 160 Housing construction for the LEF (housing units against service) 68 90 Housing construction for the personnel of Ministry of Defense (housing units 4.6 9 16.5 12.5 18.4 20.2 against service) Home loan for Ministry of Defense personnel 406 Repair of the Army housing units (housing units against service) 100 Housing assistance to the Armed Forces personnel through the headquarters of 8.5 9.9 9.5 11.4 13.2 the commanders of the armed forces Against service (staff) Housing units of Ministry of Science, Technology and 1.9 3.7 2.6 4.4 7.7 Research Building construction for the Qom Theology School (Houzeh Elmieh Qom) 6 9 40 Assistance to the Teachers Housing Savings Fund 65 82.6 140 Against service (staff) Housing for the Organization of Physical Education 1.8 1 11.2 17.5 4.8 Ministry of Housing, against service (staff) Housing construction 2.1 3.4 8.9 15.5 34.6 17 Credit and technical assistance for housing (30804 and 3083040 112 136.4 145.8 272.5 351 428 Housing Foundation- Rural housing 1.3 1.6 5.5 15.8 17 Staff housing for Ministry of Industries 0.71 0.97 Staff housing for Ministry of Roads and Transportation 0.8 1.7 1.6 1.9 Building construction for the Iranian State Railway 2.1 1.5 1.35 2.8 Assistance to the Housing Foundation 4.1 5 Completion of the low-cost housing units 5 5 Credit to the completion of the staff (against service) housing units 5 5 Assistance to the housing facilities of the civil servants 50 2.3 8 15 19.4 19.4 Housing construction for the students of Qom Theology School 2.3 2.3 Ministry of Housing- housing for the low-income group 4 4 191 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Type of expenditure 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Rehabilitation of the damaged housing units in the imposed war in Khouzestan 68 30 Province Minimum Total 176 169 255 491 854 1,495 Note: Due to differences in sources and definitions, there are inconsistencies between Tables A3-20, A3-21, A3-22 and A3-23 Source: Compiled by The World Bank based consultants reports using the Act of Budget, Tehran: MPO, various years. 192 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-22. Public works, public buildings, & public housing expenditures in the government budget (RI b) 1996/97 1997/98 1998/99 1999/00 National budget 862 1,161 831 1,577 Public buildings and establishments 404 623 391 621 Construction plan of state buildings 199 279 271 466 Construction plan of law enforcement forces buildings 64 115 120 154 Construction plan of other public buildings 142 229 0 2 Housing provision 158 195 204 371 Construction plan of workers' residential complexes 2 3 1 3 Construction plan of civil servants staff (against service) housing 21 25 30 50 Construction plan of housing in damaged regions 0 0 0 0 Plan of credit assistance for housing 135 164 168 307 Plan of rural housing 0 1 2 6 Plan of land and housing affairs' coordination 0 2 3 5 Research and investigation plan 0 0 0 0 Urban development 291 337 228 575 Plan of urban development planning 3 6 5 29 Plan of establishment and development of drinking water installations 2 1 2 0 in urban areas Plan of establishment and development of sewage system installations 183 171 141 330 in urban areas Plan of establis hment of urban areas security system installations 4 5 4 7 Plan of transportation improvements 85 151 76 204 Plan of establishment of other urban installations and facilities 12 1 0.5 4 Improvement plan of urban affairs and municipalities management 3 2 0 1 Research and investigations plan 0 0 0 0 Urban and rural housing and development research 8 6 8 11 Provincial (ostan) budget allocations* 784 941 617 757 Sub-total 1,646 2,102 1,448 2,334 Provincial Allocation for housing investment 296 237 89 78 Allocation for current expenditures 8 9 10 11 Sub-total 304 246 99 89 TOTAL 1,950 2,348 1,547 2,423 a. Includes provincial credits of the sections of construction and public installations of urban housing and development Note: Due to differences in sources and definitions, there are inconsistencies between Tables A3-20, A3-21, A3-22 and A3-23 Source: Economic report and balance sheet of 1378 (1999­2000), Central Bank of Iran. 193 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-23. Allocated Budgeted versus actual capital expenditure in public housing in monetary terms (RI b) 1996/97 1997/98 1998/99 1999/00 Budget Actual Budget Actual Budget Actual Budget Actual Workers' residential 3 3 4 3 3 2 4 3 complexes Civil servants' staff 25 20 42 32 67 38 41 50 quarters Plan of credit assistance 184 146 375 164 412 164 410 307 Plan of rural housing -- -- 12 2 13 2 13 6 Plan of the coordination -- -- 10 2 7 3 7 5 between land and housing affairs Sub-total 212 169 463 203 502 209 475 371 Provincial (related to 39 270 99 212 88 89 78 75 ostan) credits TOTAL 251 439 542 414 588 298 552 446 Note: Due to differences in sources and definitions, there are inconsistencies between Tables A3-20, A3-21, A3-22 and A3-23. Source: Management and Planning Organization, economic report of 1375-78 Table A3-24. Budgeted versus actual capital expenditure in public housing in physical terms Plan Floor area produced m˛ (estimation)a Number of housing units (estimation) 1996/97 1997/98 1998/99 1999/00 1996/97b 1997/98 1998/99 1999/00 Workers residential 5,400 5,000 3,000 3,600 45 50 30 36 complexes Civil servants' staff 40,760 52,750 63,834 47,845 340 527 638 479 quarters Plan of credit assistance -- -- 185,000 383,925 -- -- 1850 3839 Plan of rural housing -- 2,500 3,667 6,912 -- 25 37 69 Plan of the coordination -- -- -- -- -- -- -- -- between land and housing affairs Provincial (related to 540,000 353,334 148,238 94,182 4500 3533 1482 942 ostan) credits Total 586,160 413,584 403,739 536,494 4885 4135 4037 5365 Notes: (a) The average floor area of a housing unit is taken as 100 m˛ (during 1376-78). (b) The average floor area of a housing unit is taken as 125 m˛ in 1375. Source: Management and Plan Organization, economic report of 1375­78 194 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-25. Revenues related to housing sector in the government budget (RI b) 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 National Rent or allocation of 1.8 1.9 _ _ _ 10 properties Revenue earned from 2.5 3.8 5 5 governmental housing units Revenue earned from land 1.5 1.9 8.1 6.6 6 7 development Sale of low-cost housing 3.8 5.9 5.3 5 5 units Revenue earned from urban 2.3 1.2 3.1 3.9 10 10 land allocation Revenue of previous _ _ _ _ 100 40 investments for social housing Total 5.6 8.8 19.6 19.6 126.0 77.0 Provincial Public housing sale 1.8 0.1 0.1 0.3 1.7 1.7 Rental and sale of public 7.4 1.0 5.7 0.4 0.3 0.3 lands Sale of low-cost housing _ _ _ _ 3.2 3.2 Revenue earned from land 1.5 1.4 2.1 1.1 4.6 4.6 development Revenue earned from sale of _ _ _ _ 2.6 2.6 housing units excluding housing consumption pattern Total 10.7 2.5 7.9 1.8 12.4 12.4 TOTAL 16.3 11.3 27.5 21.4 138.4 89.4 Source: Compiled by the World Bank based on consultants reports using The Act of Budget, Tehran: MPO, various years 195 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.7. Procedures for allocation of public land At present the National Organization of Land and Housing allocates land in the following ways: Allocation of land via bid Allocation of lands through bidding is used, for the most part, for urban lots threaded into the texture of the cities. Allocation is conducted through public advertisement in the high- circulation newspapers. The base price of the bid is also at the day's prices. According to this method, the total price is proffered in cash at the time of allocation. The buyer is not bound to construct a residential unit, but he/she can apply any kind of land use in accordance with the urban regulations. Also the buyers of these lands can sell them to a third person. Allocation of land in large parcels to the housing mass producers (developers) Allocations of large land parcels are priced according to agreement. The mentioned price cannot be less than the cost price of the land, which is the sum of the raw price of land and the cost of land improvement. In this method, parcels of the improved lands are allocated to the professional housing builders in order to perform the mass-production housing projects. These land allocations are performed through publishing advertisements in the newspapers. In this method, the buyer is bound to implement the mass production project in accordance with the timing programs. Allocation of land in contribution form Allocating and awarding lands is performed as a contribution to the housing construction. According to this method, the land is a government contribution and the construction capital is considered the contribution of the partner (professional builder). So no funds are received for the price of lands. At the end of task, based on the agreement, a percentage of the ground floor of the built unit is possessed by the government, which sells its own share from the residential units at the day's price and via bidding. Allocation of land to construct rental housing by the private sector Annually, at least 10 percent of the lands available for allocation in selected cities should be allocated for the construction of rental housing by the private sector. In accordance with the law designed to encourage the construction and supply of rental residential units, these units must be utilized by the builder as rental accommodations .The builder may sell the units after five years. The base price of this type of land should be based on expert advice. But to support such builders, the government gives a 15 to 65 percent discount. The discount method is in reverse relation--that is to say, the lower price is subject to a greater percentage discount, and the higher price is liable to a smaller percentage discount. For example, when the price of each square meter of land is IRR100,000, it will be subject to a 65 percent discount; land valued at more than IRR400,000 a square meter is subject to 15 percent discount. 196 Iran--Strategies for the Housing Sector Annexes - Chapter 3 The method of receiving the price of lands in this type of allocation is by installment, in that 30 percent of the land price is received when the contract is signed; the rest is receivable in three-year installments (up to completion of construction). Regulations on allocation of land to individual applicants: The lands can be allocated to the individual applicants who have not been considered eligible under allocations identified in the previous items. By observing the legal priorities accorded educational staff (Ministry of Education personnel) for access to housing and the groups that are supported by the government in accordance with certain regulations, lands can be allocated to individual applicants via advertisement or on the basis of privilege; successful applicants are chosen from this pool of qualified people. All the parcels, which are transferred to the individual applicants, are provided at cost. This annex was reproduced by the World bank from consultants reports. 197 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.8. Allocation of Public Land Table A3-26. Allocated public land by type and year (Amount in IRR 1,000; U=unit; M=area in 1,000 m2) Residential Non-residential Total allocation Revenue (RI) Year Mass producers Cooperatives Individual Rent Total U M U M U M U M U M U M U M Total per m2 1979­80 - - - - 61 18 - - 61 18 - 61 18 2,587,015 143,723 1980­81 - - 288 88 9,404 2,467 - - 9,692 2,555 2,794 2,111 12,486 4,666 2,587,015 554 1981­82 256 100 9,339 3,410 18,571 5,697 - - 28,166 9,207 695 1,723 28,861 10,930 2,587,015 237 1982­83 474 151 3,864 858 4,809 1,304 - - 9,147 2,313 279 797 9,426 3,110 2,587,015 832 1983­84 8,858 2,669 16,535 4,219 31,860 8,515 - - 57,253 15,404 1,001 5,494 58,254 20,898 13,292,289 636 1984­85 8,477 2,956 35,273 7,581 45,593 12,312 - - 89,343 22,849 1,367 3,265 90,710 26,114 14,718,087 564 1985­86 8,508 2,523 25,323 5,423 36,071 9,365 - - 69,902 17,311 896 3,630 70,798 20,941 19,068,615 911 1986­87 11,742 2,804 17,063 3,997 33,600 8,787 - - 62,405 15,588 801 3,907 63,306 19,495 14,617,440 750 1987­88 9,874 2,275 13,730 3,754 30,459 7,439 - - 53,053 12,468 804 5,559 53,857 18,027 15,524,883 861 1988­89 9,424 2,028 10,217 2,309 23,959 5,767 - - 43,600 10,104 840 6,673 44,440 16,777 15,900,425 948 1989­90 12,718 2,634 13,136 2,595 26,993 6,339 - - 52,847 11,568 694 4,134 53,541 15,702 19,957,422 1,271 1990­91 33,092 5,740 17,990 3,785 24,045 7,890 - - 84,127 17,415 1,498 13,816 85,625 31,231 32,862,338 1,052 1991­92 67,097 10,965 23,596 4,988 55,581 12,715 - - 146,274 28,668 2,612 27,131 148,886 55,799 43,413,640 778 1992­93 74,008 14,264 41,765 8,939 89,754 21,949 - - 205,527 45,152 4,147 43,751 209,674 88,903 61,264,870 689 1993­94 60,928 15,759 42,041 9,827 78,257 17,722 - - 181,226 43,308 3,775 35,148 185,001 78,456 82,453,332 1,051 1994­95 16,533 2,648 21,755 3,451 56,231 12,271 - - 94,519 18,370 2,604 23,722 23,722 42,092 61,459,319 1,460 1995­96 48,497 10,141 21,432 3,829 50,772 11,299 - - 120,701 25,269 6,113 23,992 126,814 49,261 197,888,260 4,017 1996­97 33,297 6,135 11,331 2,552 40,616 10,140 - - 85,244 18,827 3,933 50,520 89,177 69,347 223,814,084 3,227 1997­98 14,289 1,813 13,752 2,499 36,746 8,909 18,273 1,177 83,060 14,398 3,130 13,948 85,190 38,346a 146,707,316 5,176b 1998­99 4,967 557 6,342 1,285 29,713 7,146 61,370 2,805 102,392 11,793 1,903 20,048 104,295 31,841 262,446,301 8,242 1999­ 1,136 1,554 6,973 2,943 27,098 6,906 22,227 1,111 57,434 12,514 2,009 32,151 59,443 44,665 366,798,514 8,212 2000 2000­01 8,541 14,444 8,524 1,873 19,866 12,467 1,130 57 38,061 28,841 1,973 32,079 40,034 60,920 408,670,598 6,708 Total 431,716 102,160 359,259 79,205 780,059 197,425 103,000 5,150 1,674,034 383,941 42,868 353,599 1,716,902 737,540 2,009,205,593 2,724 Notes: (a)Th ere seems to be a computation mistake by 10,000. The actual sum should be 28,346. (b) his is calculated based on corrected total allocated volume of 28,346 m2. Source: World Bank estimates based on consultants reports using MHUD, MLHO Database 198 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Table A3-27. Allocated land by province 1378 1379 Area Price Area Price Allocated Weight Price in the capital Weighted Allocated Weight Price in the capital Weighted Province (ostan) (m2) (%) of the province price (m2) (%} of the province price East Azarbayejan 175,000 2 574,000 8,808 791,000 3 662,000 18,190 West Azarbayejan 246,000 2 373,000 8,045 310,000 1 419,000 4,512 Ardebil 131,000 1 286,000 3,285 147,000 1 298,000 1,522 Esfahan 774,000 7 847,000 57,482 1,570,000 5 1,028,000 56,066 Ilam 136,000 1 233,000 2,778 133,000 0 298,000 1,377 Bushehr 509,000 4 233,000 10,399 276,000 1 298,000 2,857 Tehran 1,109,000 10 1,450,000 140,995 13,659,000 47 1,890,000 896,777 Chaharmahal and Bakhtiyari 43,000 0 233,000 878 38,000 0 298,000 393 Khorasan 339,000 3 671,000 19,945 164,000 1 776,000 4,421 Khuzestan 1,213,000 11 465,000 49,456 3,012,000 10 595,000 62,255 Zanjan 102,000 1 345,000 3,085 38,000 0 517,000 682 Semnan 254,000 2 233,000 5,189 50,000 0 298,000 518 Sistan & Baluchestan 294,000 3 296,000 7,630 173,000 1 457,000 2,746 Fars 425,000 4 644,000 23,998 96,000 0 821,000 2,738 Qazvin 93,000 1 604,000 4,925 2,376,000 8 752,000 62,068 Qom 618,000 5 495,000 26,822 10,000 0 554,000 192 Kordestan 205,000 2 233,000 4,188 232,000 1 298,000 2,402 Kerman 676,000 6 233,000 13,810 419,000 1 351,000 5,109 Kermanshah 691,000 6 365,000 22,114 265,000 1 415,000 3,820 Kohgiluyeh & Boyerahmad 19,000 0 233,000 388 26,000 0 298,000 269 Golestan 64,000 1 474,000 2,660 150,000 1 575,000 2,996 Gilan 147,000 1 423,000 5,452 2,163,000 8 512,000 38,471 Lorestan 209,000 2 233,000 4,270 36,000 0 298,000 373 Mazandaran 155,000 1 233,000 3,167 257,000 1 298,000 2,660 Markazi 174,000 2 502,000 7,659 119,000 0 646,000 2,670 Hormozgan 2,097,000 18 233,000 42,841 659,000 2 298,000 6,822 Hamadan 155,000 1 391,000 5,314 80,000 0 461,000 1,281 Yazd 352,000 3 310,000 9,568 1,538,000 5 379,000 20,249 TOTAL 11,405,000 100% 495,153 28,787,000 100% 1,204,437 199 Iran--Strategies for the Housing Sector Annexes - Chapter 3 1378 1379 Area Price Area Price Allocated Weight Price in the capital Weighted Allocated Weight Price in the capital Weighted Province (ostan) (m2) (%) of the province price (m2) (%} of the province price Source: Iran Statistical Yearbook, Tehran: Iran Statistical Center, various years and World Bank calculations. This Table is reproduced from Table A3-26. 200 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.9. Market rent Table A3-28. Average monthly rental and deposits agreed in contracts concluded between landlord and lease-holder in real estate agencies per one square meter of floor area for a housing unit by selected cities 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 City Rent Deposit* Rent Deposit* Rent Deposit* Rent Deposit* Rent Deposit* Rent Deposit* Rent Deposit* Arak 1,393 15,279 1,737 19,008 2,101 24,072 2,617 32,631 3,354 38,685 3.989 43,870 5,495 63,035 Ardabil 1,976 15,845 2,334 13,892 2,343 12,646 2,592 12,910 3,390 24,540 4,567 34,107 5,445 49,111 Oromieh 1,830 12,166 2,112 12,255 2,476 15,585 2,705 17,395 3,774 23,702 5,027 32,731 5,929 52,239 Esfahan 1,803 38,925 2,051 46,732 2,372 53,816 3,001 65,926 3,678 81,804 5,050 84,040 7,002 107,495 Ahwaz 1,946 28,056 2,348 36,817 2,778 44,750 3,272 60,225 3,959 72,855 5,333 84,440 6,814 122,761 Tabriz 2,109 22,304 2,589 26,262 3,109 30,481 3,798 38,857 4,340 49,075 5,312 54,607 6,784 72,838 Tehran 3,387 108,109 4,345 116,910 5,060 130,894 5,805 160,998 7,595 195,078 10,471 242,519 13,640 323,837 Dezfoul 1,717 14,030 1,954 16,663 2,169 22,154 2,814 25,110 3,293 31,514 4,795 49,129 5,417 71,126 Rasht 2,115 47,489 2,745 61,516 3,564 65,198 4,493 79,512 4,526 102,376 5,598 102,823 6,951 147,583 Zahedan 1,736 14,076 2,240 17,220 2,932 18,914 3,325 24,449 3,964 37,374 4,889 41,606 6,103 61,863 Zanjan 1,903 20,978 1,968 25,806 2,587 28,876 2,989 37,394 3,580 42,668 4,604 54,157 6,033 70,073 Shiraz 1,225 40,986 2,513 54,553 2,857 68,417 3,425 86,059 4,113 93,483 5,632 112,461 7,446 129,889 Qazvin 2,358 33,781 3,051 41,561 3,611 49,295 4,235 66,912 4,860 79,292 6,273 87,743 8,200 105,916 Qom 1,543 26,976 1,956 34,921 2,469 40,350 2,750 48,629 3,313 60,701 4,497 56,970 5,527 80,151 Karaj 1,981 59,218 2,495 65,481 2,861 75,589 3,349 97,351 3,968 125,561 5,600 147,165 7,546 187,899 Kerman 1,732 10,449 2,167 14,313 2,654 28,247 3,170 27,779 3,678 41,180 5,056 53,460 6,684 62,504 Kermansha 1,776 24,439 1,996 27,466 2,317 31,752 2,866 39,742 3,420 50,920 4,328 58,426 6,182 83,778 Gorgan 1,983 26,622 2,280 29,990 2,682 37,172 3,522 47,114 4,042 54,520 5,178 62,887 6,537 91,295 Mashad 1,952 22,941 2,365 30,539 2,773 35,362 3,363 47,675 3,963 57,915 5,129 61,449 6,425 85,286 Hamedan 1,306 23,853 1,556 28,318 1,874 33,781 2,472 40,791 2,974 45,885 3,760 52,994 5,592 81,522 Yazd 1,571 10,982 1,772 12,565 2,053 19,517 2,504 23,314 3,137 32,286 4,345 37,158 5,524 65,825 * Assumed to be annual deposit. Source: World Bank estimates based on consultants reports using Household Surveys, Tehran" Iran Statistical Center, various years 201 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Annex 3.10. Utility statistics Table A3-29. Utility Expenditures 1996/97 1997/98 1998/99 1999/00 2000/01 Urban households Annual expenditure (RI) 330,732 423,951 539,842 779,834 851,704 Number of households 7,948,925 8,266,882 8,597,557 8,941,460 9,299,118 Subtotal (RI b) 2,629 3,505 4,641 6,973 7,920 Rural households Annual expenditure (RI) 289,973 365,625 463,339 701,656 864,988 Number of households 4,410,370 4,454,474 4,499,018 4,544,009 4,589,449 Subtotal (RI b) 1,279 1,629 2,085 3,188 3,970 Total (RI b) 3,908 5,133 6,726 10,161 11,890 Notes: (a) Statistical Year Book. (b) For years 1997/98­2000/01, figures calculated assuming 4 percent annual growth. (c) Statistical Year Book. (d) For years 1997/98­2000/01--calculated assuming 1 percent annual growth. Growth rates from World Bank database. Source: Statistical Year Book and authors' calculations. Table A3-30. Annual Utility Expenditure by Income Distribution (RI in 2000/01) Decile of income distribution 1 2 3 4 5 6 7 8 9 10 Average URBAN 288,495 476,170 577,125 657,995 781,845 835,092 976,752 1,068,272 1,143,140 1,471,887 expenditure Average RURAL 250,238 448,232 556,487 658,019 738,664 852,292 943,291 1,079,025 1,311,950 1,774,868 expenditure Source: World Bank estimates based on consultants reports. 202 Iran- Strategies for the Housing Sector Annexes ­ Chapter 3 Annex 3.11. Flow of Subsidies Figures include only those subsidies identified and reviewed in this paper. Figure A3-1. General Housing Subsidies in Iran's Housing Market Government - Imposed profit rate caps - Imposed price - Subsidies to Housing Bank ceilings Energy Banks companies Energy at below Manufacturers market prices of construction Utilities materials Subsidized construction materials Construction companies Profit House price Subsidized rate caps subsidy utilities Homeowners / buyers - - - - implicit subsidies ____ explicit cash subsidies Iran--Strategies for the Housing Sector Annexes - Chapter 3 Figure A3-2. Subsidies for Assisted Housing Government - Imposed profit Imposed price rate caps ceilings - Semi-finished - Subsidies to Profit rate housing units Housing Bank subsidies - Financing 10% limit on Energy companies profitability Funds Banks (RTO) Profit rate Energy at below market prices subsidies Construction Manufacturers Utilities companies of constr. mat. Land Housing with and land deferred payment Subsidized development at subsidized Profit rate Profit rate House price construction Subsidized subsidies interest rates caps subsidies subsidy materials utilities (1) Public servants and workers (2) Women headed households (3) Young families (4) Teachers - - - - implicit subsidies ____ explicit cash subsidies NOTES: Subsidies that are available to everybody in the market are in grey, while subsidies specific to assisted housing are in black 204 Iran--Strategies for the Housing Sector Annexes - Chapter 3 Figure A3-3. Subsidies for Social Housing Government - Grants or public funding at subsidized interest rates for on-lending - Imposed profit - Land at discounted price rate caps Imposed price - Subsidies to Profit rate ceilings Housing Bank subsidies Bonyads Energy Banks companies 10% limit on profitability (RTO) Profit rate Energy at below market prices subsidies Construction Manufacturers Utilities companies of constr. mat. - Grants or loans at subsidized interest rates Land - Construction/ and land Subsidized reconstruction of development Profit rate Profit rate House price construction Subsidized housing and TA subsidies caps subsidies subsidy materials utilities (1) Low income households (2) Special groups - - - - implicit subsidies ____ explicit cash subsidies NOTES: Subsidies that are available in to everybody in the market are in grey, while subsidies specific to social housing are in black 205 Iran- Strategies for the Housing Sector Annexes ­ Chapter 5 ANNEXES ­ CHAPTER 5 Iran- Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-1. Dwellings by Type of Structure in Urban and Rural Areas, 1365 and 1375 Total Steel frame Concrete Steel & Concrete Steel & Brick or Brick & frame frame Stone Timber 1365/1986 Whole Country 8,217,375 273190 3,534,158 1,292,208 Percentage 100.00 3.32 43.01 15.73 Urban 4,669,722 242,513 2,977,666 614,757 Percentage 100.00 5.19 63.77 13.16 Rural 3,547,653 30,677 556,492 677,451 Percentage 100.00 0.86 15.69 19.10 1375/1996 Whole Country 1,0770,112 1,125,383 429,338 1,554,721 4,836,029 1,528,139 Percentage 100.00 10.45 3.99 14.44 44.90 14.19 Urban 6,913,730 1,075,417 37,4106 1,449,523 3,848,392 604,181 Percentage 100.00 15.55 5.41 20.97 55.66 8.74 Rural 3,856,382 49,966 55,232 105,198 987,637 923,958 Percentage 100.00 1.30 1.43 2.73 25.61 23.96 Concrete block Brick & Stone Timber Adobe & Timber Adobe Miscellaneous N/A 1365/1986 Whole Country 429,923 151,381 59,522 1,541,298 828,599 53,946 53,150 Percentage 5.23 1.84 0.72 18.76 10.08 0.66 0.65 Urban 207,419 7,4014 15,008 254,135 239,537 11,536 33,137 Percentage 4.44 1.58 0.32 5.44 5.13 0.25 0.71 Rural 222,504 77,367 44,514 1,287,163 589,062 42,410 20,013 Percentage 6.27 2.18 1.25 36.28 16.60 1.20 0.56 1375/1996 Whole Country 667,505 246,748 39,322 1,079,368 561,779 80,324 176,177 Percentage 6.20 2.29 0.37 10.02 5.22 0.75 1.64 Urban 306,383 134,714 13,313 200,178 205,748 26,130 125,168 Percentage 4.43 1.95 0.19 2.90 2.98 0.38 1.81 Rural 361,122 112,034 26,009 879,190 356,031 54,194 51,009 Percentage 9.36 2.91 0.67 22.80 9.23 1.41 1.32 Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-2. The Share of Major Structural Types in Building Permits Issued in Urban Areas Year Steel & Percentage Annual Change Steel & Percentage Annual Change Total brick (percent) concrete frame (percent) 1375/1996 103,751 76.95 22,648 16.80 134,837 1376/1997 98,170 74.59 ­3.07 25,053 19.03 13.32 131,619 1377/1998 98,670 73.48 ­1.48 27,484 20.47 7.53 134,282 1378/1999 96,556 71.39 ­2.85 29,451 21.77 6.39 135,253 1379/2000 85,491 67.62 ­5.28 32,623 25.80 18.50 126,435 Source: Calculations made on the basis of data from Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Table A5-3. Building Permits Issued in Urban Areas by Number of Stories Year 1 story 2 stories 3 stories 4 stories 5 stories Including the Excluding the and more city of Tehran city of Tehran 1377/1998 Number 66,718 46,717 16,743 3,092 1,012 N/A 134,282 Percentage 50 35 12 2 1 N/A 100 1378/1999 Number 66,983 47,113 19,126 10,359 3,791 147,372 135,253 Percentage 45 32 13 7 3 100 92 1379/2000 Number 61,886 43,059 17,794 15,911 7,203 145,853 126,435 Percentage 42 30 12 11 5 100 87 1380/2001 Number 59,158 42,356 20,576 21,215 10,949 154,254 Percentage 38 27 13 14 7 100 1381/2002 Number 60,039 46,930 25,174 11,723 7,177 151,043 Percentage 40 31 17 8 5 100 Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Table A5-4. Urban Building Permits Issued, Selected Provinces, 1999 and 2000 Tehran Esfahan Khorassan Fars Khoozestan Total for 5 Whole Provinces Country Number 27,190 17,765 11,312 10,444 7,782 74,493 145,853 Percentage 19 12 8 7 5 51 100 Number 19,383 19,935 1,0679 11,703 8,199 7,4493 147,372 Percentage 13 14 7 8 6 48 100 Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. 208 Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-5. Domestic Production of Cement 1374­1381 (199 ­2002) Year 1374 1375 1376 1377 1378 1379 1380 1381 (1995) (1996) (1997) (1998) (1999) (2000) (2001) (2002) Amount of Cement 15,460 16,442 16,995 20,049 22,219 24,000 26,650 28,300 Produced (1,000 tons) Annual Increase (percent) 6.35 3.36 17.97 10.82 8.02 11.04 6.19 Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002, for data up to 1999. The data for 2001 are from Ministry of Industries and Mining. Data for 2000 and 2002 is estimated. Table A5-6. Domestic Production of Ceramics and Tiles, 1374­1383 (1995­2004) Year 1374 1375 1376 1377 1378 1379 1380 1381 1382 1383 (1995) (1996) (1997) (1998) (1999) (2000) (2001) (2002) (2003) (2004) Amount of Ceramics and 44,451 47,090 46,616 53,309 64,105 64,772 69,325 73,878 78,430 82,983 Tiles Production (1,000 sq. m.) Annual Increase (percent) 6 ­1 14 20 1 7 7 6 6 Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002, for data up to 1999. The figures for 2000 to 2004 are projected figures. Table A5-7. Production of Construction Equipment, 1374­1378 (1995­1999) Year 1374 (1995) 1375 (1996)1376 (1997) 1377 (1998) 1378 (1999) Heavy Machinery 394 425 882 616 532 Annual Increase (percent) 7.87 107.53 ­30.16 ­13.64 Trucks 2379 3316 3827 5491 3938 Annual Increase (percent) 39.39 15.41 43.48 ­28.28 Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Table A5-8. Qualified Professionals in Tehran and Seven Provinces (2001) East Esfahan KhorassanKhoozestan Fars KermanshahMazandaran Total for Tehran Total for Country Azerbaijan 7 8 Total Provinces Provinces Architecture 112 233 351 58 107 33 93 987 4782 5769 6256 Percentage 2 4 6 1 2 1 1 16 76 92 100 Construction 2241 2809 3257 1728 1800 341 1729 13905 22284 36189 43620 Engineers Percentage 5 6 7 4 4 1 4 32 51 83 100% Building 5848 17765 11312 7782 10444 3479 3947 60577 27190 87767 147372 Permits Percentage 4 12 8 5 7 2 3 41 18 60 100 Permits/ 2.6 6.3 3.5 4.5 5.8 10.2 2.3 4.4 1.2 2.4 3.4 Engineers Source: Unpublished data from Engineering Disciplinary Organization, 2001. 209 Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-9. Distribution of Employment Opportunities by Sector 1379 (2000) 1380 (2001) 1381 (2002) New Plan Implemented Plan % Implemented Plan % Implemented Plan % 1381 (2002) TOTAL 434,900 498,500 87.2 489,800 684,800 71.5 558,200 808,800 69.0 938,100 Employment Agriculture 14,000 17,500 78.9 13,400 25,000 53.4 15,900 29,600 53.8 37,150 Mining & 252,000 252,300 99.9 292,600 351,900 83.1 308,500 416,000 74.2 445,800 Industry Sector Mining & 158,100 134,200 117.8 157,200 182,700 86.0 154,800 216,000 71.7 216,800 Industry r Costruction 93,900 118,100 79.5 135,400 169,200 80.0 153,700 200,000 76.9 229,000 Services 158,400 216,600 73.1 172,000 291,300 59.0 220,300 343,600 64.1 432,350 Transportation, 59,400 73,300 81.1 70,400 85,200 82.6 79,000 100,100 78.4 114,450 Communications, etc. Commerce, 56,000 76,500 73.2 58,900 113,000 52.1 78,200 133,500 58.6 170,800 Restaurants, Hotels, Financial Institutions, etc. Public, Social, 43,000 66,800 64.4 42,700 93,100 45.8 63,100 110,000 57.4 147,100 Private services Misc. 10,500 12,100 87.2 11,800 16,600 71.5 13,500 19,600 69.0 22,800 Source: The Revised Plan for Employment Opportunities (as approved by the Board of Ministers), Tehran, Government of Iran, 2002. Table A5-10. Estimates of Labor for Building 1 sq m Built Area, by Type of Structure Non-skilled Semi-skilled Skilled Labor Total Labor Type of Construction Labor Labor (Man days) (Man days) (Man days) (Man days) Concrete Joist & Block 1.22 1.09 1.67 3.98 Block Walls Roof Steel Roof 2.39 0.81 1.47 3.67 Brick Walls Timber Roof 2.39 0.81 1.47 4.67 Brick Vault 2.39 0.81 1.47 4.67 Steel Roof 2.39 0.81 1.47 4.67 Steel Frame Joist & Block 1.22 1.09 1.67 3.98 Roof Steel Roof 1.22 1.09 1.67 3.98 Reinforced concrete 1.22 1.09 1.67 3.98 Source: Gholamali Farjadi and Hassan Safari, Project on Employment in the Housing Sector, Institute for Research in Planning and Development, Tehran: Management and Planning Organization, 1997. 210 Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-11. Estimate of Employment in Housing Sector Year Steel Brick Masonry Adobe Cement Brick Masonry & Total Structure & Steel Roof Block Timber Roof Employment 1980 5,815 548,024 2,049 - 21,093 629,337 1981 4,710 641,450 1,764 - 323,000 714,574 1982 6,368 524,908 700 - 25,996 582,282 1983 13,908 657,666 389 - 22,623 721,308 1984 10,856 750,960 181 - 17,979 819,930 1985 23,261 754,802 2,517 - 23,609 847,309 1986 32,614 686,334 0 - 27,787 770,007 1987 29,496 642,773 259 - 26,982 741,825 1988 29,032 612,444 130 - 20,548 679,070 1989 85,473 776,492 138 - 14,996 3,896,443 1990 23,930 634,912 - 23,192 13,984 693,879 1991 122,340 611,588 - 15,831 16,604 772,590 1992 165,943 403,851 - 14,832 10,066 598,973 1993 169,062 403,695 - 17,425 10,975 607,721 1994 211,116 448,891 - 13,685 9,028 690,270 1995 111,263 673,933 - 17,701 9,599 828,296 Source: Gholamali Farjadi and Hassan Safari, Project on Employment in the Housing Sector, Institute for Research in Planning and Development, Tehran: Management and Planning Organization, 1997. Table A5-12. Graded Consultants in Tehran and Five Provinces of Iran East Esfahan Khorassan Khoozestan Fars Tehran Total for 6 Country Azerbaijan Provinces Total Consultants 8 28 30 9 18 558 651 693 Percentage 1 4 4 1 3 81 94 100 Source: Data extracted from the list provided by the Deputy for Technical Affairs, Management and Planning Organization, Tehran: September 2001. Table A5-13. Graded Contractors by Management and Planning Organization, 2000 Grade Buildings- Buildings- Buildings-Total Road Building High-Tech Steel High-Tech National Provincial Concrete Number Percent NumberPercent NumberPercent Number Percent Number Percent Number Percent 1 1 0 4,569 60% 4,570 54 2 1 31 67 72 61 2 17 2 2,140 28% 2,157 26 14 4 10 22 18 15 3 7 1 603 8% 610 7 11 3 3 7 15 13 4 243 28 244 3% 487 6 96 26 2 4 7 6 5 223 25 223 3 60 16 7 6 6 232 26 232 3 81 22 7 53 6 53 1 37 10 8 106 12 106 1 66 18 Total 882 100% 7,556 100% 8,438 100% 367 100% 46 100% 119 100% Note: Maximum possible grading differs for each category of contractors. However a certain company might be graded in a number of categories. Usually for under Grade 4, contractors' grading is done at the provincial level; t he results are thus quoted separately. Source: Data extracted from The List of Building and Installations Contractors: National (not Provincial) Contractors Eligible for invitation to Bidding and Contracting, Tehran: Deputy for Technical Affairs, Management and Planning Organization, 2001. Unpublished data, Deputy for Technical Affairs, Management and Planning Organization, 2002, for provincial contractors. 211 Iran- Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-14. Distribution of Provincial Contractors in Selected Provinces of Iran East Esfahan Khorassan Khoozestan Fars Kermanshah Mazandaran Total for 7 Tehran Total for 8 Country Azerbaijan Provinces Provinces Total Grade 1 227 85 357 892 227 379 179 2346 350 2696 4570 Grade 2 227 93 206 151 160 86 113 1036 342 1378 2157 Grade 3 44 32 53 25 43 10 38 245 150 395 610 Grade 4 20 22 27 1 9 5 17 101 82 183 487 Total 518 232 643 1,069 439 480 347 3,728 924 4,652 7,824 Percentage 7 3 8 14 6 6 4 48 12 59 100% Source: Extracted from the data provided by the Deputy for Technical Affairs, Management and Planning Organization, Tehran: September 2001. Iran- Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-15. Executive Capacity of Individual Contractors Group Province(s) or Region Maximum Appropriate Total Executive Commission (RI m) capacity (RI m) 1 Tehran 60 100 2 East Azerbaijan, Esfahan, Gilan, Mazandaran, 70 120 Markazi 3 Khorasan, Hamadan, Zanjan, Semnan 80 140 4 Southeast Fars, Chahrmahal Bakhtiari, 90 160 Kerman, Lorestan, Yazd, West Azerbaijan 5 Ilam, Booshehr, South Khorasan, Sis tan 100 180 Baloochestan, Kurdistan, Kohgilooyeh Booyer Ahmad, Hormozgan, Khozestan, Bakhtaran 6 Abu Musa, Jask, Khark, Dayyer, Qeshm, 120 200 Kolahi, Kish, Larak, Lavan, Moqam, Hormoz, Hengam, other islands, Booshehr, Hormozgan. Note: The figures will be adjusted each April according to general adjustment indices. The figures are for Buildings, Roads, and Water and Sewerage categories; for Urban Infrastructure, Installations, and Power the limits are multiplied by a factor of 0.5. Source: Regulations for Qualification of Building and Installations Contractors and Contracting, Deputy for Technical Affairs, Tehran: Management and Planning Organization, 2001. Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-16. Contractors Grading Points and Mini mum Requirements for Buildings Category Grade Minimum Maximum Maximum Minimum Requirements for Machinery, Appropriate Appropriate number of Equipment and Toolsa Project Cost Project Cost permissible Heavy Semi- Light Equipment (Capacity) projects heavy & Tools 1 50 200 2 2 100 300 2 1 3 3 150 400 2 1 1 4 4 400 800 2 1 3 5 5 600 1,500 2 1 2 4 6 6 1,000 2,500 3 2 3 5 7 7 1,500 3,500 3 3 4 6 8 8 2,500 6,000 3 4 5 7 10 Grade Minimum Points Minimum Qualifications of Partners and Executive Working Finance Total Executive Board Manager Experience & & Board Creditb 1 250 30 300 One person equivalent to university diploma in civil engineering and 5 years experience 2 350 70 500 One person equivalent to university diploma in civil engineering and 10 years experience 3 600 200 100 1,200 One person equivalent to B.Sc. in civil engineering and 7 years of experience; or One person equivalent to B.Sc. in civil engineering and 7 years experience, and One person equivalent to university diploma in civil engineering and 5 years experience 4 1,000 700 200 2,200 Two persons, each equivalent to B.Sc. in civil engineering and 7 years experience 5 1,200 1,000 400 3,200 Two persons, each equivalent to B.Sc. in civil engineering and 10 years experience 6 1,500 1,400 700 4,200 Two persons, each equivalent to B.Sc. in civil engineering and 10 and 15 years experience, respectively 7 2,000 1800 1,000 5,400 Three persons, each equivalent to B.Sc. in civil engineering and one with 15 and two with 10 years experience 8 2,200 2,000 1,400 6,500 Three persons, each equivalent to B.Sc. in civil engineering and 15 years experience Notes: (a) Samples include: (i) heavy machinery: bulldozers, loaders, graders, mechanical shovels, trucks over 10 ton capacity, dump trucks, truck mixers, draglines, tower cranes, trench cutter, side booms, etc; (ii) semi-heavy machinery: finishers, concrete pump, rollers, trucks 5-10 ton capacity, bunkers, backhoe, etc; (iii) light machinery: vehicles, tractors, dumpers, auto mixers, lift trucks, rail winder, etc; (iv) equipment and tools. (b) Points for Finance and Credit are calculated according to the following method (Article 23). The procedures for calculating points awarded for Finance is as follows: (i) The sum for the following amounts should be calculated as positive: Liquidity; deposits and mortgages at banks, or with clients or persons; bank accounts; other receivables; Receivables for approved quantity surveys or bills of materials; due payments for mobilizations; securities; other liquidity assets; goods in store or on road; letters of credit opened by banks and permanent assets (excluding depreciation value of assets). (ii) The sum for the following amounts should be calculated as negative: Debts to banks clients or persons; debts because of mobilization payment, debts because of insurance, tax, etc.; other liabilities; Five points are awarded for each positive IRR million. The procedures for calculating points awarded for Credit is the sum of the following: Loan credits against mortgage; securities with clients: (i) One point is awarded for each IRR million; (ii) The points awarded for Finance and Credit is the total points awarded for A and B. Source: Regulations for Qualification of Building and Installations Contractors and Contracting, Tehran: Deputy for Technical Affairs, Management and Planning Organization, 2001. 214 Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-17. Private Sector Expenditures in Construction Projects in 1375 (1996), IRR m Number of Total Total Materials Labor Misc. Projects Costs Country 3,157,193 14,189,559 10,699,125 6,975,379 2,999,024 724,722 New Buildings 209,655 9,167,251 5,711,677 3,806,685 1,492,190 412,802 Total Urban Projects 205,3236 11,824,185 8,472,373 5,550,048 2,336,579 585,746 Urban New Buildings 136,875 8,115,204 4,784,205 3,210,158 1,217,023 357,024 Extensions & Renovations 401,535 2,608,453 2,582,932 1,681,143 764,173 137,616 Total Rural Projects 1,103,957 2,365,374 2,226,752 1,425,331 662,445 138,976 Rural New Buildings 72,780 1,052,050 927,473 596,527 275,167 55,779 Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Table A5-18. Private Sector Investment in Urban Housing in 1375 (1996) IRR m 1374/1995 1375/1996 1376/1997 1377/1998 1378/1999 Average Total Investment 7555 12832 17779 17950 23180 Investment in Tehran 2890 5834 6683 4843 6020 Other urban areas 4665 6998 11096 13107 17160 Investment in Tehran (%) 38% 45% 38% 27% 26% 35% Other urban areas (%) 62% 55% 62% 73% 74% 65% Annual increase for total investment 70% 39% 1% 29% 35% Annual increase for Tehran 102% 15% -28% 24% 28% Annual increase for other urban areas 50% 59% 18% 31% 39% Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. 215 Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-19. Dwellings Built by Sector According to Issued Permits Year Public Cooperative Private Total Number of units 1370 1991 6,315 14,225 149,472 170,012 1375 1996 4,289 19,493 163,354 187,136 1376 1997 5,956 25,310 156,143 187,409 1377 1998 5,072 24,493 168,886 198,451 1378 1999 7,314 19,951 183,792 211,057 1379 2000 10,775 15,889 194,979 221,643 1380 2001 8,885 19,586 225,548 254,019 1381 2002 8,452 24,488 314,925 437,865 Percentage 1370 1991 4 8 88 100 1375 1996 2 10 87 100 1376 1997 3 14 83 100 1377 1998 3 12 85 100 1378 1999 3 9 87 100 1379 2000 5 7 88 100 1380 2001 3 8 89 100 1381 2002 2 6 72 100 Notes: (a) Data excludes the city of Tehran. Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Table A5-20. Active Cooperatives in Some Provinces of Iran (number and percent) East Esfahan Khorassan Khoozestan Fars Tehran Total for 6 Country Azerbaijan Provinces Total 327 291 467 366 341 1810 3602 5481 6% 5% 9% 7% 6% 33% 66% 100% Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Table A5-21. NLHO Rental Housing Projects by Type of Contract (number of projects and percent) Contracts Joint venture Private Total Projects 339 254 75 668 51% 38% 11% 100% Dwellings 53163 41137 14518 108818 49% 38% 13% 100% Source: Database of the National Land and Housing Organization, 2000 216 Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-22. Issued Building Permits by Type of Landa Demolished Buildings Gardens &Farmlands Bayer land Total Number 1370 Area 7,024 4,077 31,597 42,698 (1991) Permits 2,8119 5,557 83,308 116,984 1379 Area 3,020 1,332 36,548 40,900 (2000) Permits 10,781 2,759 11,2895 126,435 1380 Area 4,025 1,669 39,215 44,908 (2001) Permits 11,617 2,394 114,175 128,186 1381 Area 4,595 1,824 41,723 48,141 (2002) Permits 16,253 2,531 132,259 151,043 Percentage 1370 Area 16 10 74 100 (1991) Permits 24 5 71 100 1379 Area 7 3 89 100 (2000) Permits 9 2 89 100 1380 Area 9 4 87 100 (2001) Permits 9 2 89 100 1381 Area 10 4 87 100 (2002) Permits 11 2 88 100 Notes: (a) Data excludes the city of Tehran. Source: Statistical Yearbook 1380, Tehran: Statistical Center of Iran, 2002. Table A5-23. Dwellings Built through NLHO Land Allocation Years Individual Cooperative Developers Total Number 1358-1367 1979-1988 234,387 130,722 57,613 422,722 1368-1372 1989-1993 283,766 139,637 246,598 670,001 1373-1379 1994-2000 256,095 84,305 122,491 462,891 Percentage 1358-1367 1979-1988 55% 31% 14% 100% 1368-1372 1989-1993 42% 21% 37% 100% 1373-1379 1994-2000 55% 18% 26% 100% Source: Database of the National Land and Housing Organization, 2000 217 Iran--Strategies for the Housing Sector Annexes ­ Chapter 5 Table A5-24. Facilities provided for Public Servants Cooperatives Cities Conditions Land Allocation Payment Conditions All Cities Comply with Housing Experts' price with no 50% Cash; 50% in three Consumption Pattern bidding procedures year installments Selected Cities Comply with Housing 60% discount on land 50% Cash; 50% in three Consumption Pattern price year installments Note: Installments in the three years are without interest rates and for each month of additional physical progress an additional discount of 10% to 30% might be applied. Provincial Engineering Disciplinary Organization determines the experts' price. Source: Unpublished data form the National Land and Housing Organization, 2002 Table A5-25. Facilities Provided for Developers Cities Conditions Land Allocation Payment Conditions All Cities No Conditions Bidding procedures Cash Comply with Housing Experts' price with no Cash Consumption Pattern bidding procedures Average Built Area 50 sq. m. 25 percent discount on 50 percent cash; 50 percent experts' land price in three year installments Selected Cities Comply with Housing 25 percent discount on 50 percent cash; 50 percent Consumption Pattern experts' land price in three year installments Average Built Area 50 sq. m. 50 percent discount on 50 percent cash; 50 percent experts' land price in three year installments Al-Ghadir project (rental 80 percent discount on 50 percent cash; 50 percent units) experts' land price in three year installments Note: Installments in the three years are without interest rates and for each month of additional physical progress an additional discount of 10 to 30 percent might be applied. 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