"Home price slide has begun and will accelerate"

Avi Tiomkin  photo: Einat Levron
Avi Tiomkin photo: Einat Levron

Avi Tiomkin: When the change occurs, its speed and force will surprise everyone.

"It is completely clear that a fall in housing prices in Israel, accompanied by a drop in land prices that has already begun, is about to pick up speed in the near future," Avi Tiomkin, a global economic consultant to international hedging funds, told "Globes."

"Globes": How did you reach that conclusion?

Tiomkin: "The leading indicator, namely a significant fall in housing sales, has already become a fact. There are a number of factors in this process: intensive activity by Minister of Finance Moshe Kahlon and his ministry, who are totally focused on this matter, together with actions taken in the field, global economic processes, and the time that had to pass in order to offset the damage of the preceding minister of finance's 0% VAT plan."

Tiomkin, who has scored previous successes in predicting substantial changes in direction in the Israeli and global economies, asserts, "There is no doubt that the concentrated effort to increase the supply of housing on the one hand and the halt in demand by both long-term investors and speculative buyers on the other are having an effect.

"The substantial drop in luxury housing sales in Israel in 2016 (over 50%) and the nominal 8% decrease in mortgages (a 13% fall in real terms taking into account the increase in housing prices) are the best proofs of this. The highest inventory of housing units for sale in Israel since 2000 (31,000 units) and other indications are reinforcing the public's belief in the commitment of the parties dealing in the matter, and are naturally changing the market's expectations.

"It is evident around the world," Tiomkin continues, "that there is a 25% slide in prices in the leading luxury housing markets, such as New York, London, Miami, and San Francisco (where the high-tech industry is located). We’re also seeing these price falls and stagnating sales today in Tel Aviv and the luxury neighborhoods around it. Cases of housing buyers overseas letting go the advances they paid in order to get out of a deal are already not so rare. This process is now spreading to a lower price level. Note that luxury residences led the price rise, and they are also leading the market turnaround."

Is the Ministry of Finance policy the sole reason for the increase in the housing supply and the halt in demand that you are describing?

"Of course not. Massive construction of new housing began one or two years ago at the peak of the euphoria among contractors and the banking system, in the absolute belief that price rises would never end. This housing is now reaching the market and contributing to the surplus."

"Keep in mind," Tiomkin adds, "the boost, tantamount to fostering panic among potential housing buyers, given by the media with various headlines. This generated substantial pressure among buyers, and certainly contributed substantially to higher prices and the lengthening of the process we previously saw."

No wave of bankruptcies so far

Three years ago, in a "Globes" article, Tiomkin wrote, "If the Ministry of Finance and the Bank of Israel continue their destructive policy, the crisis about to occur within a short time will cause a crash in housing prices, accompanied by a crisis in the banking system. The steep fall in housing prices will cause much of the public, which is currently spending a large proportion of its money on mortgage payments and interest, while taking comfort in the increasing value of its property, feelings of bitterness and despair. This will be accompanied by a wave of personal bankruptcies of unprecedented proportions and a huge social crisis."

This scenario has not actually occurred to this day.

"Obviously. What actually happened was an increase in housing demand, because the Bank of Israel radically changed its monetary policy, cutting the interest rate to zero and continually pouring money into the markets, including intervention in the forex market. This generated large-scale demand in the housing market, which encountered a very small supply."

Tiomkin says that there are now a number of conspicuous reasons for a change in the basic upward price trend. "First of all, there is a substantial increase in inventory and supply. Secondly, global short-term and long-term interest rates have begun to rise. Thirdly, the strong shekel, mainly against the euro, is pushing down demand from foreign investors, especially buyers from France. Housing purchases by foreign investors have reached their lowest level in a decade. A fourth factor is financing difficulties experienced by overseas private buyers, accompanied by significant enforcement of the restrictions on transfer of payments in the framework of the war against money laundering. Finally, the number of immigrants is falling, mainly from France and Ukraine."

You are talking about a drop in price, but this is not actually visible.

"Contractors and the banking system have a clear interest in maintaining housing prices, and even increasing them, and especially in not admitting that prices are going down. Beyond the clear reasons of higher profits, another important reason is that an official drop in prices (list prices) has a negative impact on the collateral held by the banks, and increases the pressure on the contractors for additional collateral. Paradoxically, it is preferable for both of these parties to refrain from selling and to increase inventory and/or to provide indirect benefits to buyers, but not through the price - something that is actually taking place.

"Of course, a time will come, and in my opinion, has already arrived, when the unholy cooperation between the contractors and the banks can no longer conceal the actual facts. The rule is that when an important economic trend changes direction, it takes time, but once it is underway, its speed and force will be greater than expected. This rule will also apply this time."

Already skeptical in 2016

A year ago, in a lecture to students at the Tiomkin School of Economics at the Herzliya Interdisciplinary Center, Tiomkin expressed skepticism about the completion of Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) huge acquisition of Allergan's generic division for $40 billion, given the changes in global economic trends.

A year has passed, and the Teva share has lost half its value, among other things because of the acquisition, which now looks too expensive.

"I hope that Teva's management is able to cope with the changes facing it, because in the end, we all have a stake in Teva."

Published by Globes [online], Israel Business News - www.globes-online.com - on January 16, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Avi Tiomkin  photo: Einat Levron
Avi Tiomkin photo: Einat Levron
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