The housing and construction sectors have been significant for the Iranian economy both in terms of employment as well as capital formation. Contributing to about 5% of the country’s gross domestic product, the health of the construction sector has also been an indicator of the overall economic outlook in the country. However, recent property price developments have caused a slowdown in investments in this important sector, leading to questions on the future of such ventures, especially considering the fact that a comprehensive nuclear deal could pave the way for a new economic momentum in Iran.

Historically, investments in the housing sector had been a safe strategy in the Iranian economy. Due to a growing demand and a tendency to prefer investments in tangible assets, property prices offered a guaranteed profit in Iran until 2012 with very few exceptions of short-term stagnation. Nonetheless, since the summer of 2013, an unprecedented real decline in housing prices has been experienced. According to the Statistical Center of Iran, housing prices have dropped by 14.3% in the 12 months prior to March 20.

A more nuanced analysis indicates that the biggest drop in prices was seen in Tehran. In the regions outside Tehran province, 14 provinces witnessed price declines, while 15 provinces experienced price increases. Within Tehran province, while there was overall price decline in the capital, some areas surrounding Tehran witnessed a price rise. This indicates that internal migration is also at play.

The current decline is partly the bursting of a bubble that had been generated between 2005 and 2012, as I had explained in an Al-Monitor article in June 2013. The single most important factor changing the overall dynamics in the Iranian housing sector was the introduction of the Mehr housing project that had been designed to offer affordable housing units to lower income classes. However, according to Hossein Abdo Tabrizi, a respected economist and former secretary-general of Tehran's stock exchange, the Mehr housing project failed to ease the pressure on lower-cost housing units and created a completely new category of housing. Other experts believe that the Mehr housing project served speculators more than the lower income classes. Though the Hassan Rouhani administration had no choice but to complete the many Mehr housing project sites, there are still a large number of unfinished buildings that have blocked some of the financial resources dedicated to the housing sector in the country, especially the resources of the state-owned Housing Bank.