The election of Hassan Rouhani as Iran’s new president has generated a lot of enthusiasm among Iranian society and the business elite. The significant drop in the value of the US dollar on the country’s free currency market is the surest sign that Rouhani’s victory has created a positive momentum. It remains to be seen whether the new government will manage to use it to tackle some of the urgent social and economic issues in the country. While many are focusing on basic issues such as inflation, unemployment and sanctions, society is facing another challenge that is not receiving enough attention: housing.

Iran's housing sector had been accustomed to ups and downs connected to investment cycles in the country. However, a number of factors have led to an unprecedented upheaval in Iranian housing, and the Rouhani government will need to develop a workable strategy to return the sector to a degree of normalcy.

To understand the current imbalances in the housing sector, one needs to look back at how the events of the past few years changed its dynamics. Prior to the President Mahmoud Ahmadinejad administration, most of the investment in housing came from the country's private sector. Small to medium investors would mainly construct new residential units, which, under normal circumstances, had been a profitable business. This meant that there was always enough interest from capital investors to engage this sector. Even banks and state companies that were not mandated with constructing housing entered this sector as it offered above-average rates of return. Occasional imbalances in the market were usually corrected through market forces, and the supply and demand would find a new equilibrium after short periods of uncertainty.

However, three hiccups during the Ahmadinejad years led to a lasting crisis in the market. Before discussing the market disruptions, it should be noted that in the period between June 2005 (Ahmadinejad's first election) and June 2012 (the latest available data), land prices in urban areas grew by 81%, but the price of housing units increased by 220%. Furthermore, the cost of renting an average flat in urban areas rose by 254% in the same period. The demand for housing units grew much faster than the demand for land — usually an investment tool for many investors. In other words, the country as a whole is facing a lack of appropriate housing units, an issue that is directly related to three key phenomena that emerged during the Ahmadinejad administration.