In the past decade, ministers of construction and housing and ministers of finance have consistently put a large portion of the blame for rising housing prices in Israel on investors, who a decade ago accounted for over 30% of housing buyers.
"The low interest rate has increased the volume of purchases by investors to unprecedented proportions; their share of the market reached a peak of 33% of deals in the housing market in 2010," then-Minister of Construction and Housing Ariel Atias stated in 2011. At the same time, then-Ministry of Finance Yuval Steinitz declared that a "ten-pound hammer" would hit investors, so that they would get rid of their housing units and sell them quickly in order to benefit from a temporary exemption from betterment tax. Current Minister of Finance Moshe Kahlon tried to push investors out of the market with a tax on people owning three or more homes and tax benefits for people moving money from housing to the stock market (the bills stalled) and through the Buyer Fixed Price Plan, which offers a discount only to people buying their first home.
The ministers' war against investors was a numerical success. The proportion of homes purchased by investors fell dramatically, but the real objective of lowering home prices was not achieved. The operation may have been a success, but the patient did not get better.
A review of the residential real estate sector for the second quarter published by the Ministry of Finance shows that the proportion of investors in the market has reached a historical low of 14% of total deals in the market - only 3,200 housing units. It is already clear that the assumption that pushing investors out of the market would lower prices was, and still is, incorrect.
And a word on the low interest rates that supposedly fuel purchases by investors. The interest rate is still low. Just last week, Governor of the Bank of Israel Karnit Flug left it unchanged. And the investors? They have already dropped out of the market.
Net purchases by investors in Israel
Netanya: Stagnation in housing purchases by foreign residents
What has happened in Israel's cities, especially those that were popular among investors? The Ministry of Finance said that the steep decline in investors' purchases extended to all regions, including in cities in outlying areas where their purchases were prominent a few years ago.
The steepest drop in housing purchases by investors last year was 41.3% in Netanya in the second quarter of 2018, compared with the corresponding quarter last year. Prevailing opinion attributes the decline mainly to stagnation in housing purchases by foreign residents. Tel Aviv was next with a 36.2% drop in housing purchases by investors, followed by Hadera with a 30.7% decrease.
The 10 leading cities in investors' purchases
Housing purchases by investors in the second quarter were down 27% in the central district, followed by a 24% plunge in the Haifa district, a particular favorite for investments because of the cheap apartments available near institutions such as Haifa University, Technion, Israel Institute of Technology, and Rambam Healthcare Campus, in comparison with the second quarter of 2017.
Yaron Shamir, franchise holder of Re/Max Avenue in Holon-Bat Yam, says that the decline in activity by investors in Bat Yam, which they found attractive, is clear. "There is a drop in interest by investors, which caused an 8-10% rise in rents in Bat Yam in the past year. This is no surprise, of course, because when supply falls, the price rises. There are no vacuums in the market. As soon as you choke off investors with higher taxes, they no longer buy apartments and some sell, so rents will probably rise. Two years ago, the return on a rental property was 3.5%, and it fell to 3.2-.3.4% over the past year. The return recently went back up a little."
"Globes": According to what you see, where are the investors going?
Shamir: "There is a lot of interest in buying overseas apartments. Many people are asking for advice, and there is unquestionably a strong outward flow of money, mainly to Europe, both because of what is happening in Israel and the desire to find alternatives, and because the market there has improved in recent years. Investors who are afraid to buy overseas properties are taking an interest in commercial real estate. I have a client who owns several apartments for investment, and now for the first time he's looking to buy a commercial property."
Beer Sheva, another favorite of investors for many years, posted a 19.3% fall in housing purchases by investors in the past year.
The Ministry of Finance's figures show that the city with the smallest decline in housing purchases by investors was Tiberias, with a 3.4% dip, generally attributed to the small supply of apartments in the city, where demand for rented accommodations is stable. This contrasts with Haifa and Beer Sheva, where construction of new housing units has been massive in recent years.
Fall in yields halts after years
What are the current returns on housing for investment? Together with the surge in housing prices, annual returns generated by apartments for investment have fallen, making the investment less attractive. A survey conducted by Geocartography for "Globes" indicates that the steep drop in the number of investors in the real estate market in the past two years has halted the fall in investors' returns in recent years.
The nationwide average return on housing units gradually fell in 2003-2016, with the trend extending to almost all districts in Israel. The fall in yields was due to the steep rise in housing prices, which has not yet been translated into corresponding rises in rent paid by tenants. The average return on housing units fell from 4.5% to 3% in recent years.
Average rate of return on housing units
According to Geocartography, however, the decline in returns halted in 2017, with a slight rise in the return on some small housing units, for several reasons. First of all, the government's measures halted the rise in housing prices. Secondly, the government's taxation measures in the third quarter of 2016 began pushing investors out of the market. Thirdly, rents began to rise, probably as a result of the first measures.
Expectations of an interest rate hike are also likely to make housing investments less worthwhile, together with a flood of apartments put up for rent by purchasers under the Buyer Fixed Price Plan. To this should be added thousands of long-term rental apartments being built by the government through the Apartment for Rent company in Haifa, Jerusalem, Tel Aviv, Herzliya, Holon, Or Yehuda, Shoham, Ramle, and other cities.
The Geocartography economic department has analyzed average returns on four-room apartments in various cities in Israel. They found that in the largest cities, returns on apartments are still falling, especially in Tel Aviv and Jerusalem, where demand for apartments is the highest and investors are still present.
Migdal Capital Markets chief economist Yossi Shvimer says, "What interests investors is the interest rate and the return on a housing unit. A year ago, the mortgage interest rate was 3.04%; now it is 2.85%. In other words, the interest rate is lower than it was a year ago. On the other hand, in comparison with the past month or two, the interest rate is unquestionably rising, and there may be expectations that this trend will become stronger and the interest rate will increase."
Concerning the annual return on a housing unit. Shvimer says that it is rising, not falling. "According to the Consumer Price Index, it was 2.96% a year ago, and now it is 3.03%. The key, however, is rent, and according to the index, the increase in rents has slowed in the past two months (the housing item in the Consumer Price Index was 2.8% in June, 1.9% in August, and 1.7% in September). It may be that investors intent on to selling the apartment shortly after buying it, and who are less concerned about the return from rent, no longer expect a sharp rise in housing prices."
Commenting on the stock market indices, Shvimer cited the following interesting figure: "The stock market real estate index rose 23% in 2017, but has fallen 6% since the beginning of this year. This figure may also reflect investors' concern about the challenges that projects like the Buyer Fixed Price Plan pose to real estate companies on the Tel Aviv Stock Exchange."
Published by Globes [online], Israel business news - en.globes.co.il - on October 15, 2018
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