Fischer erred badly on housing prices

Dror Marmor

Since 2005, when Fischer took up his post, housing prices in Israel have risen 70%.

Alongside all the superlatives, Governor of the Bank of Israel Prof. Stanley Fischer became a major headache for Prime Minister Benjamin Netanyahu, especially over the handling of the housing shortage. It will be hard without him, but was even harder with him.

The man who said in 2011, two weeks into the social protest on Tel Aviv's Rothschild Boulevard, "I hope we won't see here a 30% drop in home prices," cannot change the direction of the ship captained by the prime minister, who last month told us that he will cut home prices by 30%.

From Fischer's perspective, it is too risky to return bolted horses back to the stable. Reducing housing prices will cause deflation; the great hope of people who don’t own a home is a lethal blow to the economy. If we believe that prices will fall tomorrow, there is no reason to buy today. First, contractors, agents, assessors, and architects will be without work, followed by more and more people who will suffer from the slowdown.

But opposite him are Netanyahu and the ministers at the cabinet table who believe that there is simply no choice. An entire generation of discharged soldiers who are studying, marrying, and bearing children should also be able to buy an apartment.

Fischer talks about and acts to cool rising housing prices and prevent a bubble, while Netanyahu talks about turning back the clock. This does not go together, so Fischer quit the game.

While commentators around the world are saying good-bye to Israel's "responsible adult", there are hundreds of thousands of Israelis who appreciate the title a bit less. "The responsible adult is responsible for the rise in home prices": since 2005, when Fischer took up his post, housing prices in Israel have risen 70%, compared with the 21% rise in the Consumer Price Index (CPI).

The housing shortage always existed (and no one lives on the streets). The lack of skilled workers has always existed (that is what happens when an industry depends on Palestinians or work visas for foreign workers). But nothing prepared the market for negligible interest rates, which caused a land and housing rush nationwide.

Under the cover the global crisis, Fischer cut the interest rate to 0.5% in April 2009. With such a low interest rate, mortgages are cheap and bank deposits offer no returns, there is nothing like buying an apartment. In the worst case, it offers an investor a return of 3% from tenants, usually tax free. In retrospect, buyers achieved phenomenal returns, because of the rise in housing prices. Only someone who did not have the chance to buy an apartment, possibly someone who thought it insane to buy an apartment without at least 30% equity or with a variable interest mortgage that is liable to soar to become an intolerable monthly payment, suddenly discovered that he had no chance of becoming part of the game.

But the absurdity is that Fischer's economy, the so-called famous "island of stability" that was a source of pride for the country and the world, rode a wave of real estate prices driven by Fischer's interest rate. When the whole world was mired in a severe economic crisis, the Bank of Israel and Ministry of Finance could celebrate and roll in the huge tax revenues.

Revenues from land taxes and land sales NIS 15 billion in 2011. This does not include VAT on new home sales, companies tax revenues, income taxes, and other revenues from the booming real estate market and the fact that 1.5 million Israelis felt like millionaires, albeit on paper.

Fischer's inflation is under control? That is what happens when the housing item in the CPI, a quarter of the index, has, since 1999, only covered the change in rent, and does not include housing prices.

Unemployment at a historic low? That is what happens when a discharged soldier can organize a buyers group, or super-real estate agent, or seller of apartments at sale shows.

Only in late 2010, after housing prices rose 40% within three years, did the Bank of Israel begin to realize that there was a problem. Not because the public was starting to demand housing at reasonable prices, but because the central bank was frightened by the risks the banks and homebuyers were taking as they sought to buy one apartment after another.

Fischer created a new status quo in housing prices, and he merely wanted to protect it. As far as he was concerned, these were the new prices, and it is the governor's job to slow the onrushing train. He had already seen what collapsing housing prices did in the US from whence he came, and he dared not imagine that Israel could go through a similar shock.

But a new governor will arrive, and it is not at all certain that he go along with the ambitious housing declarations of Netanyahu (and Yair Lapid, Naftali Bennett, and every MK). Whoever the next governor is, he can forget about the huge credit Fischer had and his ability to emasculate de facto every initiative by Netanyahu.

Somehow, by some alchemy, the new governor will have to preserve the Israeli economy - the banks, real estate industry, which employs hundreds of thousands of people, and hundreds of thousands more who rely on it - while the prime minister who will appoint him will dry to roll the housing train backwards.

Hold on tight.

Published by Globes [online], Israel business news - - on January 30, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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