As far as can be judged, a turnaround occurred in July in how Israeli households assess the past and current economic situation. In July, Israelis finally realized that the economy is not as stable as they were led to believe, and that financial markets are far more risky than they had assessed. Not just reports about the crisis in Europe, but mainly domestic reports about "sovereign decisions" by Prime Minister Benjamin Netanyahu and Minister of Defense Ehud Barak. There is no better proof about households' conclusions than the Ministry of Finance's latest survey on the housing market.
According to the picture described by the ministry today, the housing market was stagnant through June, its condition for the preceding year. Home prices and sales fell slowly, although the situation was better than in June 2011.
But something unusual happened in July, says the Ministry of Finance. "Preliminary figures for July indicate an unusual increase in the number of transactions, which reflect the highest level of sales for any single month in years." The ministry goes on to say that investors drove the housing market.
It is quite possible to explain the unusual rise in sales to interest rate cuts, both those carried out and the ones expected. But this is not enough to explain the turnaround implied by the Ministry of Finance, especially since it is not all clear whether the real interest rate has fallen - it may have risen due to the drop in inflation.
It is therefore more reasonable to assume that, in July, Israelis began to sense that the housing market is virtually the only investment channel available, as they hear the scream of fighter-bombers taking off to strike Iran, and talk about the financial crisis that such a strike will cause.
If this interpretation is correct, then the coming months should see a transfer of money from financial assets to real estate, as the public seeks a safe haven for its money. The direct consequence of this development is that Israel's financial markets are already seeing the results of Netanyahu and Barak's initiatives. The real estate market is just a symptom of this reality.
Published by Globes [online], Israel business news - www.globes-online.com - on August 12, 2012
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