The two main vehicles of investment for Israelis are the stock market and real estate. 2022 was a clear victory by an exceptionally long way for those who invested in real estate.
This has reversed both long term trends and the past decade. "Globes" has reported in the past that an investment of NIS 100,000 in an Israeli apartment in 1993 would have earned returns of NIS 374,000 by 2020. But over the same period an investment of NIS 100,000 on the New York Stock Exchange would have earned returns of NIS 767,000, according to the S&P 500 Index. In almost every year in recent decades stocks have outperformed real estate.
That doesn't mean that stocks are necessarily a better investment than real estate. Research by Danny Ben-Shahar, Dr. Roni Golan and Amitay Frenkel from Tel Aviv University's Faculty of Management found that Israeli real estate is the overall best investment when taking into account passive income from rent and dividends, and taxations, and the fact that real estate allows greater leverage. It is easier to borrow to buy an apartment than to buy shares. This difference translates into a higher rise in the absolute value of the property in relation to shares.
According to the research , NIS 320,000 invested in stocks in 1998 was worth NIS 1.7 million in 2018, while NIS 320,000 invested in an apartment in Israel in 1998 was worth NIS 1.8 million in 2018. However, after the first decade in 2007, the shares were worth NIS 1.3 million while the apartment was only worth NIS 600,000.
Prof. Ben-Shahar told "Globes" that over the long term, the performance of stock markets is preferable to real estate. But over the past decade in Israel, real estate has prevailed over stocks, although he stresses that this has been a unique period and he doesn't know if this will happen in the future.
Over the past year the triumph of real estate over stocks has been even more stunning. The collapse of the stock market compared with the huge rise in real estate prices in Israel has seen real estate beat stocks by 26.4%. This difference of more than 25% has only occurred twice before - in 2002 after the dot.com bubble burst and the difference was 27.6%, and in 2009 after the sub-price crisis and the difference was 34.3%.
Share values can be wiped out within a year
While in most years, share indices exceed real estate indices, the volatility of the stock market during periods of economic crises means that in those years real estate overtakes stocks by a large margin. That is, stocks tend to bring higher returns over time for the same amount of money, but they can also wipe out a significant portion of value in one year, which happens much less in real estate. This is true for the real estate price index and average apartments.
In practice, when you buy an apartment, you don't buy an index or an average apartment - you buy a certain apartment in a certain condition and in a certain location. Therefore, it is possible that while the real estate market will remain stable - the price of the particular apartment will rise or fall dramatically. In this sense, stocks have an advantage - since you can really buy the index, and not just invest in individual stocks.
One of the clear advantages of real estate is the ability to raise capital against it, and when this possibility becomes more expensive as interest rates rise - investing in the capital market may be more worthwhile.
Published by Globes, Israel business news - en.globes.co.il - on December 19, 2022.
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