Report No. 28983 Public Disclosure Authorized Islamic Republic of Iran Public Disclosure Authorized Ministry of Housing and Urban Development Public Disclosure Authorized Strategies for the Housing Sector Public Disclosure Authorized 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....................................................................