Iran's housing prices turn many into millionaires

By Parisa Hafezi

TEHRAN (Reuters) - Negar Ehteshami just paid the equivalent of $6 million in rials in cash for a luxurious apartment. But it is not in New York or London. It is in the capital of the Islamic Republic of Iran.

"I am a millionaire because of this 300-square-metre apartment," said Ehteshami, a 56-year-old interior designer from a rich Iranian family who has always lived in an affluent northern Tehran neighborhood.

"But nothing else in my life resembles the life of a millionaire," she said, moving her Hermes handbag out of the way as she closed the window of her apartment.

"Here I feel (as though) I am inside a helicopter. I can see the whole city."

Hers is a tale with echoes in much of the West: a house price surge fuelled partly by easy lending. In Iran, however, people are still being priced out of the market.

Mansour Bagheri, a businessman living in Germany since 1980, hopes to make a fortune from this business model.

"I get loans in Europe, where I live, and buy apartments in Tehran. I am all set to become super rich," he said.

A real estate boom in the world's fourth-largest oil producer has been powered by President Mahmoud Ahmadinejad's economic policies since he was elected in 2005, economic analysts say.

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. Some economists see huge scope for the market to keep rising as, with interest rates below inflation, Iranians seek a store of value in property.

"The high prices might be a bubble," said economist Reza Abdizadeh. "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 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 10 percent.

This stimulus is also a textbook trigger for inflation and alarmed many, including the head of Iran's Central Bank, Tahmasb Mazaheri.

"It has created problems since in effect ... the main issue is massive floating capital," said economist Saeed Leylaz.

The government has said those who have used the money to invest in property and not for creating jobs will be banned from obtaining loans for five years.

Criticized by politicians and economists for his populist economic policies, Ahmadinejad cut bank interest rates despite strong liquidity growth last year. They are now well below inflation, currently above 20 percent a year.