"The most basic and most prominent fact about the Israeli housing market in recent years is the sharp rise, of almost 80%, in home prices. In international comparison, this is the highest increase among developed countries between 2007 and the third quarter of 2013," said "Globes" editor-in-chief Hagai Golan at the "Globes" 2014 Real Estate Conference on Wednesday.
"The IMF, which recently analyzed the Israeli market, found that half of the rise in home prices was due to the low interest rate and lack of alternative investments, and the other half was due to supply barriers, and the blame can be directed at the landowner - the Israeli government.
"When home prices rise irrespective of salaries, the public's purchasing power is eroded. Whereas, six years ago, 97 average salaries were enough to buy a second-hand four-room apartment, by the end of the third quarter of 2013, that figure had jumped to 129 salaries. Prices have continued to rise since then. The numbers in high-demand areas are even higher. For example, in Petah Tikva, which had the highest positive migration in 2012, you need 140 salaries to buy a second-hand four-room apartment."
Golan said that home prices were a key subject in the IMF report. "It concluded that, at the end of 2013, home prices were 25% above their equilibrium value. In other words, prices are above the level they should be under normal conditions of supply and demand based on growth, the birthrate, immigration, and the rise in the standard of living," he said.
Golan pesented two indices that reflect the housing market's long-term disequilibrium. "The first is the home prices to rents ratio, where the deviation in Israel is 23%. The second is the ratio between home prices and households' disposable income, which also shows that home prices are diverging from disposable income.
"The housing market's disequilibrium is something unique to Israel. There is a whole group of countries, including Australia, Belgium, Canada, France, and New Zealand - with figures similar to Israel's. There is another group of countries, most of which were hard hit by the 2008 crisis, in which the disequilibrium in the opposite direction: home prices are 'too low'."
Golan said that the skyrocketing home prices, which rose much more than rents, has resulted in a drop in the yield on rental apartments in Israel to a gross 3.3%. "This is one of the lowest yields in the West," he said. "But investors aren’t deterred, because the interest rate they can get from the bank is even lower, and taxes on rental income are lower than on other income."
The lack of worthwhile investment alternatives in recent years has boosted the proportion of real estate investors. The proportion of households owning more than one apartment rose from 3% in 2003 to 8% in 2012. "The social aspect of the rise in prices is reflected in the turning of an entire generation, mostly people in their 30s and 40s, into tenants, some of them out of necessity," said Golan. "In the end, we see that the figure that drew investors to the market is also the figure that will drive them out: the Bank of Israel interest rate."
Golan said that economists have tried to calculate the probability of a drop of at least 10% in home prices in real terms over the next five years. He said that they concluded that, because the Israeli housing market is in disequilibrium, the probability is over 25%. In other countries, such as Canada, the probability is higher, because there are still supply barriers in Israel that offer a kind of "insurance" against a very sharp slide in home prices.
"As for the financing side, I've been told that, in an international comparison, housing loans account for a very high proportion of total loans, and that we are in third place, behind Denmark and the US," said Golan, adding that the worrying point was that someone must bear the risk involved in the surge in home prices and in the financing of the boom.
"If you look at the monthly mortgage burden on households compared with income, it is already too high. It is higher than in the EU, and definitely higher than in the US. There is no choice but to discuss what will happen to private consumption in Israel and what will happen if and when unemployment worsens, and how that will affect the ability to make monthly payments," Golan concluded.
Published by Globes [online], Israel business news - www.globes-online.com - on March 13, 2014
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