The rise in housing prices over the past few years, which has caused Israeli homeowners to feel wealthier (even if moving to the next home will only cost them more) has contributed significantly to the growth in private consumtion in Israel.
This emerges from a study that is the first of its kind to have been carried out in Israel, published by the Bank of Israel today. The study examines the effect of the rise in home prices on private consumption, via the "wealth effect" and, to a lesser extent, as a result of the ability to borrow more from the bank thanks to ownesrship of a more valuable asset.
Sigal Ribon and Miki Kahn of the Bank of Israel Research Department, who conducted the study, conclude that the sharp rise in home prices in the period 2009-2011 (32% in real terms), and particularly in 2010 (14.5% in real terms), contributed 1-2.2% to private consumption in each of those years, about one-third of the growth in private consumption during the period, compared with a smaller contribution between 2004 and 2008, thereby offsetting part of the effect of the global crisis on the economy. The rise in rents did curb consumption among those living in rented accommodation (about 27% of all households), but it also tended to boost consumption by the fortunate landlords.
The study finds that the main effect was in the 35-55 age-group, accounting for 43% of owner-occupier households. These are people who bought properties before the price rise set in, and felt lucky, which encouraged them to expand consumption. It was found that the effect on private consumption of the significant home price increases since 2008 was stronger than that of the prolonged decline in prices during the ten years ending in 2007.
According to the study, "the home price that better explains the changes in consumption is the one that relates to a dwelling in the same area and with a similar size as that of the household, while changes in the national average price do not affect household consumption. In other words, the household attributes importance to the development of prices reflecting the area in which it lives and not those reflecting the general situation in the housing market or in the economy as a whole."
The study also finds that the rise in housing prices in the past 4-5 years was a factor in changes in the standard of living and in inequality between households.
The price rise mainly affected consumption of durable goods: cars, white goods, television sets, and furniture, and had less effect on current consumption, i.e., spending on food, beverages, medicines, and so on. The study finds that the standard of living of those who bought homes before the price rise is higher than that of those who did not. It follows that the inequality in assets between those who bought properties at the relevant time and those who did not can be expected to grow, with the gap in standards of living widening in the long term.
Published by Globes [online], Israel business news - www.globes-online.com - on May 29, 2013
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