Real estate investors who bought apartments in the past few years are at high risk of losing money, unlike those who bought investment homes earlier, according to a survey by the chief economist at the Ministry of Finance, published as part of her quarterly markets review.
Chief Economist Shira Greenberg examined sales of homes by investors in the first half of this year. Her survey shows that about half of those who bought a home from January 2016 onwards sold at a loss in real terms, especially in outlying areas in the north and south of the country.
Real estate investors seek to obtain returns both from the change in home prices and from rents. The annual return on a property is made up of both elements.
Over a decade, we became accustomed to a situation in which the capital return on a residential property was much higher than the current return from rents, as home prices rose rapidly, by more than 10% in some years. The current return in Israel, on the other hand, has been 3-4% in most years, and in recent years it has fallen to 2-3%, because of higher home prices.
This period, however, is over. Home prices have risen slowly in the past few years, and in the past two years have not risen at all. The result is that many investors have seen a steep decline in their capital returns. This was partly offset by the current return, but the disappointing overall result apparently led some investors to sell at a loss.
According to the survey, the average real capital gain (after discounting for inflation and expenses recognized for tax purposes) on homes sold in the second quarter of this year was NIS 400,000, a gain made over an average period of twenty years. The average ranges from a gain of NIS 100,000 in the Galilee region to NIS 750,000 in Tel Aviv.
Buyers of residential properties in the Beersheva area and in the Upper Galilee made the most capital losses: in these regions, the proportions of investment homes sold at a loss (out of the total number of sales) in the first half year were 15% and 14% respectively. The lowest proportions of homes sold at a loss were in Rehovot (2%) and Tel Aviv (4%).
The chief economist's survey closes on a warning: "The findings that emerge from this analysis indicate that that to the extent that the aim of purchases by investors in the real estate market is to make a real capital gain, such a gain is by no means assured, certainly in comparison with the previous decade. Clearly part of the reason for this is the sharp rise in purchase tax on homes purchased for investment (in June 2015, the rate of purchase tax on investment homes rose from 5% to 8%), but analysis of the findings shows that in the case of a quarter of the properties on which there was no gain in real terms, there no gain in nominal terms either (i.e. the selling price was equal to or lower than the purchase price)." In other words, the rise in purchase tax was not the only reason for the decline in the profitability of investment.
Published by Globes, Israel business news - en.globes.co.il - on September 2, 2019
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