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Guess where is the hottest real estate market in the world? If you guessed Tehran, you are right. While we are facing a major downturn in the American housing market, there are places in the world which are enjoying their biggest boom in history. One of those places is Tehran, Iran. Yes, Tehran is now one the most expensive places when it comes to housing. Real estate prices surged by more than 100 percent in 2007, after rising by about 65 percent in 2006 and more than 50 percent in 2005. Meaning if you bought a house in Iran for $100,000 in 2005, it is now worth at least $500,000. As a result there are now many new millionaires in Iran and I am talking Dollar Millionaires, not just Rial Millionaires!
According to a Reuter’s story last May which was picked up by Washington Post and some other major U.S. Newspapers “you pay the equivalent of $6 million in rials in cash for a luxurious apartment in an affluent northern Tehran neighborhood.” Again we are not talking about New York or London. This is Tehran where a 300-square-meter (3200 square-feet) apartment is $6 million, that is $1,875/square feet. And you thought Beverly Hills or Newport Coast was expensive!
So who are these new millionaires and how did they become so rich so fast? Well, some are your usual suspects; the well connected and children of authorities (agahzade), but many are just lucky or smart, depending on your definition, investors who invested in real estate thinking it will only go up. If you are trying to rationalize or analyze the Iranian economy using the usual models, don’t bother. None of the rules as we know it in the West such as law of supply and demand, interest rate, currency, etc. apply to the Iranian economy. The Iranian economy is just that, Iranian economy. It is not a capitalist, free enterprise or a socialist economy. Thanks to oil being over $140/barrel, inflation, the devalued dollar, a president who does not even listen to his own economic advisors and the head of the Central Bank, and of course high demand for housing, you have the formula for speculation in land and housing. Nothing else comes even close. Add to that UN and Western countries economic sanctions and things get even worse. It is not limited to Tehran and surrounding areas either; it has impacted all major cities in Iran.
According to the same Reuters story, there are now businessmen, living in Europe and United States where getting a loan is easier and even cheaper than in Iran, who use these loans and buy apartments in Tehran hoping to become rich fast. Is this a bubble like the one we saw in the States recently? Maybe. According to Reza Abdizadeh, an Iranian economist living in Iran, “The high prices might be a bubble; it might be fake and not logical. But it is a fact. Historically, housing prices have never dropped in Iran. The government might be able to stop prices from rising but will not succeed in lowering them.”
Shortly after President Ahmadinejad was elected, his government came up with a plan for “quick-impact loans,” handing out substantial sums to individuals and companies with plans to create jobs in Iran where the official unemployment rate is above 20 percent. Now any wise economist will tell you that such stimulus in a country where speculation in land and housing has been a way of life for decades is a textbook trigger for inflation. Inflation is now well over 25% based on Iran’s Central Bank data. As a result people have no other opportunity to invest, and interest rates of banks being around 16 percent, naturally money flows to real estate to keep up with inflation. The government has made several unsuccessful attempts to control prices. To top it off, it is estimated that Iran needs one million new homes each year to keep up with the growing population, but currently the country is capable of building only 600,000 new homes a year. This has put tremendous pressure on people with low/fixed income. The Reuters story quotes Mahmoud Rahimi, a 35-year-old government employee, and his wife Simin. He said it was now impossible for them to buy a small apartment in Tehran. “If we do not eat, drink and basically do not spend a penny for 40 years, then maybe we can afford to buy a 20-square-metre house,” said Rahimi. “If, of course, prices do not increase.”
Foreign capital has also played a large role in the skyrocketing real estate prices. Fear that assets may be frozen over the nuclear dispute with the Western countries and the economic recession in the West has accelerated money flow to Iran. Those rich people have money and they do not trust Iran’s banking and due to the devalued dollar and lack of alternatives, people prefer to invest in real estate.
So how do these new millionaires live? Well it is not unusual to see young men sporting a Rolex watch and Gucci sunglasses cruising down one of Tehran’s main avenues in a sparkling new BMW or Mercedes Benz. As a reporter from the Los Angeles Times recently observed, “such displays of wealth from the young and ultra-privileged are becoming an ever more frequent sight in the Iranian capital amid a growing gap between the rich and the poor.” He quotes a young civil engineer in affluent North Tehran as saying, “You need to enjoy life.” His BMW costs a staggering 950 million rials (100,000 dollars) due to import duties. The average Iranian, earning no more than 500 dollars a month, would need the entire salaries of two decades of work to buy such a vehicle. Flashy imported foreign cars, including BMW, Mercedes, Nissan and Toyota, are a surprisingly frequent sight in the country. Last year, it was reported that 37,000 foreign cars were imported into the country. The presence of these luxury cars underlines the growing gap between Iran’s rich and the underclass that faces a daily battle to make ends meet. The sad part is that over 9 million people out of a population of over 70 million are living below the poverty line according to the government stats. Inflation has caused dramatic spikes in the prices of the most basic goods and services. Social inequalities are becoming wider and not everyone is impressed by the appearance of smart new cars on Tehran’s streets.
In addition to driving nice cars and wearing high end fashion cloths and jewelry, the new rich most likely owns a villa at Caspian sea shores, an apartment in Dubai and lately some of that money is even being transferred to the Western hemisphere, especially Canada. It is not surprising that we are beginning to see U.S. based satellites advertising real estate in California as well as immigration attorneys flying to Dubai to lure the rich and famous to come to America. Spending a million dollars to buy a nice house in Southern California is not much of money for these new millionaires. It used to be if you lived in U.S., earned dollars, your money was worth a lot when you visited Iran. Now the opposite is true. Don’t worry though; much of that money will eventually flow here to the good old United States of America; as this is still the safest country when it comes to the rich and famous. Southern California for its climate and social setting most likely will absorb a big portion of that money flow.
For now all I can say is that if you own or inherited a piece of land or any form of real estate in Iran, you better check it out. You might already be a millionaire after all. For those rich people in America, I can say: move over EBay’s Pier Omidyar; here comes Ali Akbar!
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