The financial statements of Bank Hapoalim reveal that the bank sees the decline in housing prices in Israel accelerating in the coming months. This is partly because of the Iron Swords war in the Gaza Strip, but mainly because of the rise in interest rates that has caused buyers to leave the market, and hence a decline in transactions numbers and in new mortgage loans. Over the past decade, contractors, developers and others in the real estate market have constantly repeated the mantra that housing prices in Israel can only rise, a view that gained traction among the public and caused young couples to rush to buy a home as soon as they could. The figures now show, however, that this view is incorrect.
Bank Hapoalim, Israel’s second largest bank in market cap terms, is certain that the fall in housing prices will continue, citing the decline in transaction numbers, the rise in the number of unsold homes, and the fall that Central Bureau of Statistics figures already indicate.
"In the real estate market, the price falls that began to emerge before the war can be expected to accelerate," the bank states. "An appreciable slowdown in activity is manifest in a low number of transactions, a rise in the stock of unsold homes, and a slight fall in prices in the first nine months of the year."
Elsewhere in its financial statements, the bank says, "The rise in interest rates has reduced the ability of households to buy a home, and also depressed purchases by investors;" "the construction and real estate sector was impacted by market conditions even before the war broke out, and will be impacted by a further decline in demand and by difficulty in promoting housing projects after it. The longer the war lasts, the more it is liable to lead to… a fall in real estate prices."
According to the latest Central Bureau of Statistics figures, released last week, the number of unsold new homes rose to a peak in September not seen in years, of 61.400, which compares with 44,000 in April 2022, representing a 40% rise in eighteen months. The number of unsold homes is equivalent o a year’s worth of building starts, that is, to a situation in which contractors in Israel build homes and not a single one is sold for a whole year. In fact, the current situation is not far from that.
2,158 new homes were sold in September this year, 31% fewer than in the previous month and 26% fewer than in September 2022. The proportion of government subsidized homes in total sales reached 30%, which compares with just 18% a year earlier. New mortgage loans also fell, by more than 50%.
By how much are home prices falling?
Nevertheless, the official figures from the Central Bureau of Statistics still show an apparently negligible decline in home prices, of 0.1-0.5% monthly. The reason for that is that the Central Bureau of Statistics figures are cumulative, covering twelve months. Since prices rose sharply last year, and the "old" numbers have not yet dropped out of the calculation, the impression is created that prices are hardly falling. The official home prices figures released last week indicated a slight decline of 0.2% over twelve month.
The truth, however, is that prices have been declining for almost a year. Last week’s Central Bureau of Statistics figures show a decline in prices of new homes of 3.9% between August-September 2022 and August-September 2023. What if government subsidized homes are excluded from the figures? Investment house Meitav did the calculation, and found that in that case the twelve-month price decline is 8.5%.
According to Bank Hapoalim, the actual decline in housing prices is greater than that reflected in Central Bureau of Statistics figures: "The Central Bureau of Statistics data show a cumulative decline of 3.9% in prices of new homes since September 2022, and a 1.9% decline in prices of all homes in the past two months. These figures do not take into account benefits sometimes given when a new home is purchased, and so it may be that the actual decline in prices is greater." The bank here refers to special offers by real estate developers, such as exemption from linkage of the purchase price to the Building Inputs Index; a year of mortgage repayments; upgrading of the specifications for the home, such as the addition of an air conditioner; payment of the mortgage consultant’s fee; and other creative offers by developers that can be worth as much as NIS 70,000 to the buyer.
These prognostications by Bank Hapoalim find concrete expression in its financial numbers. In the third quarter, the bank raised its credit loss provision for the construction and real estate sector by NIS 432 million. In the first half year, the provision was raised by just NIS 94 million. The third quarter provision for the construction and real estate sector represents 65% of the bank’s total credit loss provision in the quarter. Its total provision for credit losses in that sector now stands at NIS 1.995 billion, 2.4% of outstanding loans to the sector. This compares with NIS 1.47 billion, or 1.9% of loans, at the end of last year.
Rising risk
Bank Hapoalim has raised the risk level it sees in the real estate sector from medium to medium-high, because of the Iron Swords war, and warns: "Because of the outbreak of war, the construction and real estate sector could be exposed to a further hit, beyond the macro-economic effects described above, such as further harm to home purchase demand and difficulties in completing projects because manpower shortages." The bank sees a general decline in economic activity as a result of the war, which in turn will mean fewer home purchase deals, leading to a more significant fall in prices.
Published by Globes, Israel business news - en.globes.co.il - on November 19, 2023.
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