BoI deputy governor hints at real estate bubble

Zvi Eckstein: Real estate bubbles around the world were characterized by a significant decoupling between housing prices and rents.

Deputy Governor of the Bank of Israel Prof. Zvi Eckstein today hinted that there was a real estate bubble in Israel, even as he immediately reiterated the Bank of Israel's official position that there isn't one.

Speaking at the annual conference of the Israeli Geographical Association at the Hebrew University of Jerusalem today, Eckstein said that real estate bubbles around the world were characterized by a significant decoupling between housing prices and rents.

"At the moment, there is apparently no bubble in housing prices in Israel, despite a beginning of a worrying trend of an increase in housing prices at a faster pace than that of the increase in rent," Eckstein said. He added that the Bank of Israel was taking steps to prevent such a situation in the Israeli economy.

Eckstein said that the primary reason for the rise in home prices was the limited supply of land for residential construction. He also mentioned the prevailing low interest rate set by the Bank of Israel, which has driven investors to the real estate market in search of higher returns.

"While the Israel Land Administration is the almost exclusive owner of land in the country (about 80%), it is involved in only 40% of residential building initiatives. Such dominance by the government in land ownership is peculiar to Israel, and the Israel Land Administration’s lack of incentives for business development is among the factors behind the upward pressure on prices during recent months, alongside the low interest rate in the economy and the increase in credit for mortgages," Eckstein said.

Eckstein said that one of the main steps required in order to reduce housing and land prices in Israel was extensive sales of state lands zoned for building, which would increase competition in the industry and the scope of private business initiative. He also advised reform of licensing and planning by local committees and supervision over them, and tax breaks to encourage mechanization in the construction industry.

Eckstein advised against the creation of new cities, which he said would result in a “zero sum game in which budget resources would be shifted away from existing cities.”

Published by Globes [online], Israel business news - - on December 6, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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