In the past few weeks, Ministry of Finance officials have been holding meetings with officials from the Israel Land Authority and the Ministry of Construction and Housing in order to advance Minister of Finance Avigdor Liberman's new housing plan, due to be presented officially next month.
The talks began under the heavy shadow of the last Housing Price index reading for 2021, which showed a rise of 2.3% in December-January in comparison with November-December. The latest reading, for January February in comparison with December-January, was considerably lower, at 1.8%, but it put an end to the hopes expressed by government ministers, Liberman chief among them, that home prices would rise by just 6% this year.
Last week, just days before the release of the latest index figures, Bank Leumi published a survey by economist Alon Kol Kreis according to which housing prices in Israel will rise by 9-13% this year.
Furthermore, the last four Housing Price Index readings indicate an annual rate of increase of 24%. That rate raises considerable concern that the government's policy is inadequate. Government officials also believe that current policy is mistaken, and that there has to be a change from what happened in the second half of last year.
Demand driving rises, not supply
The building starts statistics are an example of the fact that copying and pasting parts of previous housing programs is no longer enough. The government came into power last year when the pace of building starts was similar to that of the previous two years, that is to say, not bad. The second half of last year broke records, bringing buildings starts to numbers not seen for decades.
Nevertheless, government sources say that this is not what will bring down housing prices, and that the claim that "there's a housing shortage" is weak. Although buyers are mainly falling on new homes, the stock of unsold homes in the hands of the contractors, which represents the supply of new homes, ranged between 44,000 and 47,000 last year.
Accordingly, senior government officials believe that the rise in prices is much more to do with demand than with supply. All agree that 2022 will not see last year's record sales volumes, while the pace of construction is expected to remain similar, so that there is no concern over housing supply, and that is not what the government should be dealing with.
According to these officials, if the aim is to cool the market down, demand rather than supply should be the focus of policy. How can demand be targeted? Raising purchase tax for investment buyers and raising interest rates are part of the attempt to do that. It seems, however, that these measures are only partially effective, and they are not expected to affect prices in the immediate future.
Bank Leumi believes that although prices will not fall in the coming year, demand will moderate, and in comparison with the peak year of 2021, in which there were 151,000 transactions, transaction volumes will decline. This will be a consequence of the rise in purchase tax for investors and the change in monetary policy by the Bank of Israel. Last week, the central bank raised its interest rate from 0.1% to 0.35%, and Bank Leumi estimates that the rate will reach 0.75% by the end of 2022.
Bank Leumi does not see the latest government subsidized house purchase scheme as having any quick effect on prices, and there will be no more lotteries for discounted housing in prestigious locations such as Tel Aviv, Herzliya and Ra'anana. Those currently taking place in Tel Aviv are a leftover from the "Buyer Price" scheme.
In general, Bank Leumi finds in its survey that although demand for housing will decline this year, it will still remain high, and so prices will rise. It sees price rises moderating from next year on.
"In the coming year, demand pressures will weaken somewhat, mainly because of the expectation of a slowdown in sales," the Bank Leumi survey states. "All the same, in our view, this slowdown will be limited and home prices are still expected to rise by 9-13% over 2022.
"This is because a decline in demand generally tends to affect home prices with a delay. Many contractors will not rush to cut prices in the face of lower demand, when they consider the fairly low stock of unsold homes held by them at the end of 2021. The general rise in the rate of inflation in the economy this year also supports a rise in home prices."
Published by Globes, Israel business news - en.globes.co.il - on April 20, 2022.
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