2013 is almost over and investment houses are starting to offer forecasts for 2014. Excellence Investments Ltd. (TASE: EXCE) today fired the opening shot, which can be summarized in a single sentence: it believes that 2014 will be similar to 2013, with stock and home prices rising further. When will the turnaround come? Probably in 2015, when Israel and other countries will start to hike interest rates.
"2014 should be another good year for stock markets in Israel and other countries," says Excellence. It predicts that the Tel Aviv 25 Index will rise by 8%, and that home prices will rise by a further 7-8%. "However, there is a strong risk that, in 2015-16, there will be U-turn in home prices in Israel and other countries. The reason for the U-turn in home prices in 2014 will be the start of interest rate hikes in Israel and other countries," it says.
Excellence says that the low interest rate will continue to fuel the rise in home prices in 2014, and that the increase in supply "will take several more years." It says that the interest rate will be hiked by 50 basis points in 2014 to 1.5%, but that, in 2015, interest rate hikes in Israel and other countries will cool real estate markets.
"In the second half of the year, the shekel will weaken against the dollar, and it will be possible for the Bank of Israel to begin raising the interest rate," says Excellence. "This will of course increase mortgage costs. The mortgage interest rate on the various plans of new loans during 2014 will rise by a modest 50 basis points. Demand for mortgages will stay strong, but will be slightly less than the peak likely in 2013 (NIS 50 billion), due to the tax regulations that will come into effect at the beginning of the year."
Excellence believes that the Bank of Israel will impose additional restrictions on the mortgage market to try to rein in demand. "The Supervisor of Banks will cap the monthly repayment ratio to 30% of monthly income, and he will tighten the banks' capital adequacy ratios on mortgages with loan-to-value ratios of over 50%."
Israel is not the only country where low interest rates are inflating prices of assets. Excellence compares the current situation to the situation that prevailed before the sub-prime bubble burst in the US. "In the US, the average home price is just 7.3% less than in 2006, when the real estate bubble was inflating before the sub-prime crisis caused prices to crash. There are also signs of a bubble in Asia. There, too, central bank governors are asking themselves what will happen when mortgage interest rates return to pre-crisis levels and monthly payments rise to 25% of income. Similar situations also exist in Australia, New Zealand, Belgium, Hong Kong, Dubai, and the UK. The reason for the bubble is the same: the amount of money and its price. Only this time, it's not just happening in the US, but also in China, Asia, and in many places in Europe. The real fear of bubbles, especially in China, the UK, and the US lies in their effects on global growth."
As for the Tel Aviv 25 Index, which is at an all-time high, Excellence says, "The TASE is not yet in bubble stage, but further rises next year could definitely put the markets in dangerous territory, increasing the probability of a sharp correction."
Excellence says that, in 2014, Israeli investors will channel more money abroad because the "domestic supply is too small". It adds, "While the public's assets portfolio has risen 38% since November 2007, the value of stocks and convertibles on the TASE has fallen. This requires Israelis to seek investment alternatives in foreign stocks."
Published by Globes [online], Israel business news - www.globes-online.com - on December 3, 2013
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