Israeli housing prices falling, but not by much

Dror Marmor

A 2.4% drop in prices in the past six months must be set against the 127% increase during the decade ending last August.

After a decade during which housing prices more than doubled, prices have finally halted their upward march, and have even changed direction. Anyone in Israel who has to sell a housing unit - a contractor who can get no more credit in money or time from a bank, or a family that has already bought its next housing unit and has to sell its old home, has to compromise on the price.

While non-homeowners are waiting for the finger of fate in a lottery to point them towards a subsidized apartment (and those who have already won a lottery are waiting for the contractor to receive a building permit and call them to choose the home of their dreams); while potential investors considering the purchase of a housing unit find themselves facing a substantial entry barrier (a minimum purchase tax of 8%); and when owners of two or more housing units have an incentive to sell their investment as soon as possible to pay a reduced betterment tax (due to the linear formula according to which the tax increases as the year 2014 recedes into the past), it can be stated with certainty that the supply of housing for sale currently outstrips the demand - a situation that has not occurred in the Israeli market for many years.

A small decline in the housing prices index

Minister of Finance Moshe Kahlon, who ran in the elections on a single crucial promise - to lower the price of housing - can finally talk about a downtrend in prices, and no longer has to fear elections in this coming summer or winter.

A cumulative 2.4% drop in prices in the past six months must, however, be assessed in the light of the 127% increase during the decade ending last August. Not only is the decline quite marginal - a further drop of 55% is needed merely to reach the level of prices in 2008 - but the figure itself should be taken with a grain of salt, both because the figures are not final and because the weights for the housing prices index "were adjusted in August 2017 according to the composition of housing in Israel," meaning the entire measurement system was replaced, and it is difficult to understand the effect of the change in the formula on the index.

Keep in mind that since Kahlon became minister of finance, even after the recent correction in prices, the housing prices index has risen by over 12%, very distant from the promise by Avigdor Yitzhaki, Kahlon's outgoing National Housing Directorate head, of a decrease of at least 15% by the end of 2017.

Furthermore, while the minister of finance heaved a sigh of relief yesterday when the downtrend in the housing index continued, he was definitely disappointed by the magnitude of the change. The general housing index fell 0.2%, and the price index for new housing (of which the subsidized buyer fixed price project constitutes 18.1%) was down an additional 0.2% - NIS 2,000 less for an apartment sold for NIS 1 million - a virtual mockery.

Perhaps it is enough that prices are going down? Not necessarily. Certainly after the Central Bureau of Statistics last month reported substantial and historic 1.1% decrease in the general housing prices index (and a 0.7% drop the previous month), and a 2% drop in the new housing prices index (following a 1.3% decline the previous month). If it is trends we are concerned with, the 0.2% decrease should alarm the minister of finance - a halt in the downtrend, not necessarily an end to rising prices (which he has already declared). Another figure that should worry Kahlon comes from the Central Bureau of Statistics, which today reported a slowdown in the residential construction sector in the second half of 2017. The figures show a 3.6% annualized decline in construction. Investment in residential construction fell 6.3% in the second half of last year, after a 2.5% increase in the first half of 2017.

There is even more cause for concern. In contrast to most Western countries, in which the population is shrinking, housing demand in Israel is not merely the result of speculation and the low interest rate. The Central Bureau of Statistics reported today that on the eve of Independence Day, Israel's population stands at 8.84 million people (not including 170,000 foreigners, who must also be housed). "On Israel's 100th Independence Day, the population will reach 15.2 million," the Central Bureau of Statistics informs us. Israel's population has grown by 163,000 since the most recent Independence Day, with 177,000 births, 41,000 deaths, and 28,000 new immigrants arriving in Israel.

While the natural demand is rising by 2% each year, we only recently learned that the supply of housing dropped sharply. Housing starts totaled 46,000 in 2017, 14% fewer than in the preceding year and far below the government target of 60,000 housing starts. It seems that more contractors are joining the fence sitters every quarter, fearing to get out their cranes and start another project. Even if they have no such anxiety, the banks are telling them that they should.

At the same time, the buyer fixed price plan tenders of which the state is boasting, in which the ministry of finance is subsidizing the price of land and development, and the contractors usually do not have to worry about a lack of demand, are currently being held at a rather slow pace (NIS 45,000 lottery winners in three years, compared with over 120,000 people who have been issued eligibility certificates by the Ministry of Construction and Housing). Quite a few tenders (37% in 2017) are coming back to the state without a single bid from a contractor. In addition, it is clear that the subsidy for non-homeowners is of course a legitimate measure, but it is not a model that can be continued forever.

In the bottom line, if real estate is a long-term business (more than 10 years pass between the planning stage and the delivery of a key to an apartment, and in order for the outlying areas to prosper, more is needed than several dozen new neighborhoods in Afula or Kiryat Gat), it is absolutely clear that what we are seeing now is mainly the effect of the Ministry of Finance's measures on the short term. That may be enough for elections, but not for the supply and demand equation that determines the fate of the real estate market.

Published by Globes [online], Israel business news - - on April 17, 2018

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