Can Mortgaged-backed Securities (MBS) revive the housing sector in Iran?
Housing sector is thought to be one of the major economic forerunners in increasing total production and curbing unemployment in Iran.
This sector’s interconnection with other ones related to it—albeit, hit by extended recession—such as steel, cement, tiles and the like throughout the economy places real estate market development in the focal attention of policy makers in Iran.
There has always been a major difficulty to encourage demand among potential home buyers due to the fact that the banking system has been traditionally expected to fund the facilities needed for the sector. Since numerous restrictions are in the way of financing building projects by the bankers, the capital market of Iran is targeted to ease the process by the officials.
This was facilitated by the recent issuance of Mortgaged-Backed Securities (MBS) in Iran Fara Bourse on July 3. Indeed, this is the latest move by authorities to revamp the financial sector. MBS, which are Sharia-compliant bonds issued on the back of home loans pooled together and sold to investors, could help to stimulate the debt market of Iran and spur housing construction across a country, enjoying high population of young people.
These securities were offered with par value of IRR 1000,000 and at 18.5% discount rate, worth of 3000 Bn rials (more than $85 Mn at open exchange market rate). Coupons are paid quarterly in the course of two years. Central bank of Iran’s governor, Valiollah Seif, called the 18.5% yield on MBS “a suitable interest rate”. Bearing in mind that they were sold out in fraction of seconds after they were offered in Iran’s Fara Bourse market, might be construed as shiny days ahead of mortgaged-backed securities.
The major force behind the attraction of this financial vehicle to voracious buyers is explained to be the reduction of deposit rates in the banking system from 18% to 15% just recently, coupled with the low expected return on assets in other parallel markets namely, equities, housing, currencies and golden coins in Iran.
However, the mechanism selected to offer the paper is considered to be one of the least riskiest and fully guaranteed one. Furthermore, the portfolio chosen for the initial loans granted is among the healthiest ones never defaulted in their repayments, according to the officials in Maskan bank.
That said, Mohamad Hashem Botshekan, the CEO of Maskan bank, announced in a press conference that the bank is set to offer another IRR 10,000 Bn worth of MBS in the second phase and IRR100,000 till the end of the Iranian calendar 1395, ending 20th March, 2017.
The MBS rules specified by the Securities and Exchange Organization (SEO) contains strong consumer protection features – a reasonable precaution considering the role MBS played in 2007 when some turned sour in the United States and triggered a worldwide financial crash.
For example, Iran lacks credit rating agencies that can evaluate the creditworthiness of this new paper. In their absence, the SEO requires originators to obtain a guarantor firm that will guarantee payments for investors and provide continuous monitoring of the instruments. The current MBS are guaranteed by bank Maskan, itself, as the sole guarantor and originator of the new instrument.
But although Rouhani administration are strictly endeavoring to accelerate the momentum in economic growth through different ways and means, the requirements of the MBS market does not seem to sync with the current financial situation of the people, eager to enter this market. What is missing in this market, according to some economic experts, is the low purchasing power among potential buyers to pay back the installments on taken loans.
In the following table, what is of note is that the waiting period to buy homes has increased exponentially in the past 20 years. This is to say that Iranians disposable income after deduction of taxes and other charges did not go up in proportionate to price inflation in property market.
In other words, many first time buyers are not able to afford the repayments of the loans as it is way above their salaries, even two folds their current salaries. This is to say that only small number of Iranians are capable of such a demanding task at current economic conditions.
This is easier to understand when we take a look at the number of home loan seekers the “First Maskan Savings Fund” attracted, which proved to be less than half of the number estimated. Record recession in the construction sector in the past two years is another pain in the neck, restricting the availability of appropriate houses consistent with the budget of those interested. This is because it is hard to locate houses small in size and consequently cheaper.
Therefore, we have to see how the outcome of such measures turns out to impact the housing and construction market and see if it will help home seekers be able to afford and own a house for themselves. Finally, should everything work out very well, this will contribute to the economic growth across the country and aid the government to tackle unemployment rate and bring about welfare to the country as the end goal of such plans.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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