Alireza Ramezan writes:  Boosting bank lending is the best policy to stimulate demand in the housing sector hit hard by the recession in the past couple of years — that was an argument raised by Iran’s Ministry of Roads and Urban Development 18 months ago when it proposed a hike in mortgage loans. The Money and Credit Council, the highest policymaking body of the central bank, eventually agreed May 19 to almost double the borrowing limit for first-time buyers in Tehran to 800 million rials ($24,000 at the market exchange rate).

Another significant decision made by the council was the de-monopolization of the mortgage market. Despite the rise in mortgage ceilings, observers believe serious challenges are still on the way of potential applicants. First-time buyers are given not more than 12 years to repay the 14% mortgage loan.  The approvals put two conditions for first-time buyers to receive the maximum loan: they need to buy apartments no more than 3 years old that are no larger than 75 square meters (807 square feet).

Ministry officials, who seem to have been overactive recently in offering solutions to the housing sector, believe this time that the most important factor disrupting the market has been the deep mistrust between the two parties, an obstacle that would be addressed if banks play as a trustee. The mechanism, which is something like what happens when a letter of credit is used, would let a commercial bank to provide a guarantee that the home builder/seller receive payment in full as long as the conditions of the sale are met.

The initiative, if it does not lead to bureaucratic paralysis, could become a more attractive solution than the new mortgage plan, as there are thousands of households eager to buy a home — at a lower price through a pre-purchase process — if they are assured no risk will be posed to their capital.