The country's housing market is struggling to keep up with demographics, while project developers have created staggering overcapacity where demand is lowest.

Iran's real estate market has been a subject of interest to planning officials and policymakers, and a subject of headaches to many others. The problems in Iran's housing market are twofold. Most strikingly, Iran's population is young, and newlyweds are looking to establish households under a roof of their own. The existing shortage of housing is massive; just to keep up with the needs of new households, 500,000 additional housing units have to be constructed every year. The total yearly demand for housing units is 1.5 million, while supply is a long way off with just 700,000 units.

On the other side, there is a need to maintain, or rather regain, a certain balance in the market with regard to price levels and geographic concentration. The rapid fall of oil prices in 2014 created overcapacity in the market for luxury apartments. As oil prices are having difficulties navigating north again in a steady line, a recovery in the high-end real estate segment is not evident anytime soon. At the same time, the market is screaming for mid-segment apartments that come at affordable prices.

Renovating existing homes could be an alternative to the construction of new real estate. Urban and rural areas that are now abandoned because of an outdated, substandard, or otherwise insufficient housing stock need to be renovated. In order to rehabilitate some 5 million housing units, investments totaling USD143 billion are needed. If this ambition were to come into effect, it would significantly contribute to restoring the health of Iran's real estate market.

At the Fourth Iranian Economic Overview Conference, held in Tehran in March 2017, some of Iran's chief economists interpreted the situation in unequivocal terms. According to Hossein Abdoh Tabrizi, senior economist and advisor to the Minister of Roads and Urban Development, bad policies such as an illogical focus on commercial complexes at the expense of small dwellings, had led to the recession in the real estate market and a paradox of massive home shortage and empty houses. In 2006, some 620,000 apartments were vacant, a figure that rose with a staggering one million over the course of just five years. At the moment, more than two million flats are not occupied, or about one in every 10 residential properties in Iran. In the capital of Tehran, where demand for a place to live is highest, 13% of the houses are unoccupied. Inflating the issue, homeowners that invested in higher-end real estate are often not willing to settle for rates that are affordable to the middle class.

Recent signs show that a recovery of the housing market may indeed be on its way. Sales of construction materials are rising, and issuance of construction permits is growing again for the first time in two years. Together with a guaranteed demand for lower and middle-class homes, this provides a more than interesting investment proposition.

The new investment focus of one of the largest real estate developing companies of Iran, Maskan Investment Group, represents a step in the right direction. This company, related to Bank Maskan or the Housing Bank, announced in its three-year plan that it will allocate more funds to support lower- and middle-income people. The share of middle-income housing projects will increase to three-quarters of total housing projects. Under the plan, 390,000sqm of ongoing projects will be finished, while new projects will amount to 550,000sqm. The 4,900 mainly middle-income housing units that will be constructed under the plan will bring some relief to the stressed market.

Yet, with an expected annual excess demand of 800,000 apartments in the next few years, the need for further investments is clear, as is the attractiveness for foreign investors that can see through the real estate paradox of Iran.