Saying that housing in Israel is too expensive is like saying the sun rises in the morning. This axiom is a regrettable fact from which the Israeli consumer has been suffering in recent years.
What is interesting is to check whether, and to what extent, the burden of housing in Israel is unusual, compared with major countries and cities in Europe. Although Israel lies deep within the Middle East, Deloitte Touche Tohmatsu decided that we are interesting enough market to be part of their study examining various criteria and characteristics in the real estate market in the 17 leading countries in Europe for 2014.
Financing: Only three years to buy an apartment in Belgium
The real estate market is a capital intensive market, and its development therefore depends above all on financing concerns. The rates of leverage and local interest rate can indicate the risk in the market, since in a more challenging and problematic market, the bank will charge a higher premium (in the case of Europe, the interest rate beyond the Euro LIBOR rate - the equivalent of the Israeli prime rate).
Unsurprisingly, the faltering Russian market is at the top of this list, with the bank demanding a 10% premium from the developer in order to finance a project. The loan to value ratio (the amount of financing divided by the value of the project) in this market is 80%, one of the highest, compared with the European average of 68%.
The Israeli market is in the middle of the table, with an average premium of 2.5%, lower than the European average of 3.3% above the Euro LIBOR. Belgium is at the bottom of the list, with a banking interest spread of less than 2%, hinting that the risk in this market is moderate, which is confirmed by the fact that the working time required for a Belgian to pay for an average new apartment (70 sq.m.) is the shortest - only three gross yearly salaries.
Italy: First of all, sell half the project
For the second straight year, Italy is at the bottom of the table measuring the number of housing units whose construction has been completed per 1,000 residents. Italy and Hungary are the only two countries in which this ratio is less than 1.
According to this index, Israel enjoys a respectable ratio of 6.1, double the European average, but the index of building starts per 1,000 residents is a more disappointing 4.3. This is still above the European average, but is lower than the Israeli ratio for 2013.
Ireland: A meteoric rise
The study shows that new apartment prices rose across the board in most markets in 2014. At the same time, these figures do not take into account the inflation rate in the markets and the differences in the exchange rates of local currencies against the euro. The study also fails to neutralize trends specific to a given year.
Despite these reservations, it can be stated that the hottest European market, at least in terms of price rises, is Ireland, where the prices of new apartments soared 31.7%. This follows years of stagnation and financial crisis, and it is likely that the market will continue rising in the coming years, because the number of housing units per 1,000 residents is only 342, the lowest of the all the countries examined.
The UK takes second place with a 21.6% rise in prices, while Russia posted an abnormal 16.6% drop in prices, which, combined with the devaluation of over 50% in the ruble against the euro, could hint at opportunities in the Russian housing market for an investor not deterred by high risk.
Prices rose 11.6% in Israel, and 7.8% in Jerusalem, putting Israel in the middle of the table, between Germany and Spain.
Israel stands out in price per sq.m.
Even though the increase in housing prices in Israel is not exceptional, Israel is in second place in price per sq.m., with €4,000 per sq.m. of new construction sold in 2014, between the UK and France.
Tel Aviv is responsible for putting Israel up on the national scale. Tel Aviv is in fourth place among cities, after London, Paris, and Munich, with an average price of €6,042 per sq.m. of new construction. The figures are slightly biased, because they do not take into account the shekel appreciation against the euro, and do not compare similar properties.
One of the most prominent figures, which highlights Israel's problem, is number of work years a person must work in order to buy an average new (70-sq.m.) apartment. Israel leads the table with 13 years' gross salary, double the average in the survey, which concludes, among other things, that the property prices in Israel are significantly higher that the correct equilibrium value. At the same time, it should be kept in mind that the figures refer to new apartments only. Almost three times as many secondhand apartments are sold in Israel, and their average prices are cheaper.
The conclusion is obviously that the burden of paying for housing is much heavier for Israelis than for their European counterparts, both in absolute prices and in the ratio of income to prices. At the same time, the Israeli market is much less prominent in other parameters, indicating that the high prices are not a result of periodic one-time market failures that will come to an end; they are objective opening figures indicating that there is no quick solution on the horizon.
"The gaps in a comparison with Europe are due mainly to the special characteristics of the Israeli market - a significantly higher rate of population growth rate than in Europe and the fact that Israel is a small and densely populated country. These gaps highlight the principal difficulties facing the government, the most important of which is increasing the supply of apartments by an extent that will moderate housing prices," says Deloitte Brightman Almagor Zohar partner and real estate group head Doron Gabor. He adds, "Policy makers should take action to significantly increase the supply of housing: allocate more land at competitive prices, shorten times for obtaining building permits, provide support for appropriate infrastructure, and increase the number of employees in the sector. In addition, it is also important to provide backing for those providing credit in the market in order to facilitate the necessary rise in economic activity in the sector."
Published by Globes [online], Israel business news - www.globes-online.com - on July 20, 2015
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