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Israel faces end of decade-long housing boom

11-Jul-2017


David Wainer, Bloomberg

Housing prices in Israel have been rising for so long that many residents don’t remember what it’s like when they fall. They may be about to find out.

Signs are growing that Israel’s housing boom is sputtering, with fewer investors snapping up homes as mortgage rates rise. That hasn’t yet dented home values but it has slowed appreciation, suggesting that a 10-year trend that weighed heavily on homebuyers and policymakers may be reversing course.

It costs about $920,000 on average to buy a three-bedroom apartment in Tel Aviv -- more than in London or Amsterdam -- and more than double the nominal cost a decade ago. That has priced many people out of the market in a country where the average salary is about $35,000 per year, making housing a potent social and political issue in Israel. Lower home prices would diminish risks to the financial system, where credit for construction and residential purposes makes up more than half of all non-finance private-sector loans.

“At some point, something’s gotta give,” said Rafi Gozlan, chief economist at Israel Brokerage & Investments Ltd. “We’re now seeing the first signs of a market that’s starting to digest that prices can’t go up forever.”

Home prices have been atop the political and economic agenda since the summer of 2011, when thousands of Israelis set up protest camps over housing costs. Finance Minister Moshe Kahlon has made lower home prices a key element of his political platform, and his first act in office was to transfer construction and planning powers to his ministry. 

On Sunday the cabinet approved a plan to deepen Israel’s long-term rental market, including through tax breaks to encourage construction of rental units.

The ministry and the Bank of Israel have noted a recent cooling in the market, with investors scooping up a smaller portion of apartments on sale. In the past year, transactions and mortgage volumes have decreased as mortgage rates and taxes rose. Rates for inflation-linked fixed mortgages jumped to nearly 4 percent recently from as low as 2 percent in May 2015, partly as the central bank forced lenders to lessen their exposure to risky mortgages.

Yields on housing investments are hovering close to the cost of borrowing, earning investors near-zero returns on homes bought on full leverage, according to an analysis by Yossi Shvimer, chief economist at Migdal Capital Markets in Tel Aviv. Investors who believe the market has topped out will start looking for better returns elsewhere, he said. 

A Bank of Israel recent study showed apartment yields are averaging 3 percent, which is still above the return on long-term government bonds. The central bank in June called the housing market one of the biggest risks to Israel’s financial system, but said the “apparent moderation” in recent real-estate activity will help reduce the danger.

The Finance Ministry has sought to deter property investors by boosting purchase taxes, and adding an extra levy -- currently being contested in the High Court of Justice -- on owners of three or more apartments. That has helped lower the percentage of investment transactions from 40 percent of the total pool in early 2015 to about 15 percent in February, according to central bank data.

“We are waging a war on prices,” Finance Ministry chief economist Yoel Naveh said. “What’s clear is that real estate prices are over-stretched.”

The government, which controls most of Israel’s land, boosted construction starts by more than 10 percent in 2015 and 2016 to more than 50,000 annually, to address a supply shortage that many economists see as a major source of the price rise. The pace of starts slipped back down in the first quarter, according to a Bank Leumi report.

A government program to help young couples buy new homes also could be depressing transaction volume. Since 2015 the government has intensified its sale of land at discounted prices to contractors, who must then sell apartments at below-market prices. Israelis who don’t own a home may vie for apartments through a lottery system that will award a record 15,000 new homes later this year.

“Why would someone buy a home in the regular market now when they know the Finance Ministry is holding these lotteries, which keep growing and growing?” Shvimer asked.

The government thinks couples waiting for discounted homes may be enticed to rent for a few years, shrinking demand. There’s an over-supply of affordable rental apartments in Tel Aviv suburbs like Rosh Ha’Ayin, Naveh said.

If home prices did drop sharply it could pose a major risk to the financial system, with Israelis’ total mortgage debt to banks standing at 323 billion shekels ($91 billion) in March 2017. Shai Babad, the ministry’s director general, said last month the economy could withstand a 15 percent decline in home prices, but not 50 percent.

To protect against such risks, banks have offloaded much of their mortgage portfolios to insurance companies. But because Israel’s population growth and divorce rates create about 50,000 new households annually -- about the same as housing starts -- and the country is still short 100,000 apartments, prices aren’t likely to plunge, Shvimer said.

“I think the market will stabilize and maybe prices will go down a bit,” the Finance Ministry’s Naveh said. “But there is still demand in Israel.”


Bloomberg
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