Some are calling it the bubble that wont burst. Some say that the housing crisis will take years to rectify. It seems that no matter how many new laws, taxes or stipulations the government tries to implement in order to lower housing prices, nothing seems to work. Simple economics tell us that as long as demand outweighs supply, housing prices will continue to rise. Those investors and home buyers who sat on the fence for the last few years ,hoping for a dip in the housing prices, have slowly come off the fence and realized that they are missing the opportunities that others are cashing in on.
With mortgage lending rates at an all time low, it is no wonder many Israelis and foreign investors are putting their savings and expendable income into real estate investments. Although returns may not seem amazing at first glance, ranging from 4-6% in most cities throughout Israel, the appreciation seen over the last 7 years, more than makes up for a lower ROI over the same period.
According to the Ministry of housing, the following statistics have been compiled:
In Tel Aviv in 2008 a 4 room average apartment sold for 1,343,000 nis . In 2012 the average was 2,057,000 nis and in 2014, the price was 2,303,000 , accounting for an appreciation of approx 70%.
In Beer Sheva, the investment capital, in 2008, the average 4 rm apartment sold for 335,000 nis , in 2012, it sold for 593,000 nis and in 2014, it sold for 733,000, and increase of 120%!
In Rananna, increases in the same period showed appreciation of 50% . In Kiryat Ata approx 80%, in Kiryat Gat and in Tiberius the appreciation was 100% over the last 7 years.
In March 2015, the average mortgage interest rate in Israel was 2.12%, slightly lower than 2.34% in March 2014 and way below the 6.7% rate in January 2013.
To moderate the effect of the global crisis on the country’s economic growth, the central bank cut the key rate by a total of 375 basis points from October 2008 to April 2009, till it hit a record low of 0.5% in April 2009. But Israel was in fact less affected by the crisis than expected and by June 2011 key rates were back up to 3.25%.
In October 2011 the rate hikes stopped, and instead, the BOI lowered the key interest rate to 3.03%. It was the beginning of the continuous rate cuts over the succeeding years. The BOI´s most recent cut was in March 2015 when the key rate was cut to 0.1%, down from the previous rate of 0.25%. The rate reduction was in line with the bank’s intention to return the inflation rate within the 1-3% target, as well as to “support growth while maintaining financial stability”.
Some say Israel´s sky-high housing market is a threat to financial stability, but the signs are reassuring. Though mortgage interest rates have generally declined since 2003, the mortgage market has expanded less than expected and was only around 26.1% of GDP in 2014, up from 18% of GDP in 2000. This is a modest level of borrowing in a developed country.
And despite the fact that by end- 2013 housing debt constituted around 70% of total household debt, households in Israel still have a large surplus of assets over liabilities. The ratio of total liabilities to total assets among Israeli households was about 8% in 2012 as compared to 16% in the UK and the US, according to the BOI.
Another good sign: in early 2014, unindexed variable-interest rate mortgages were only 36% of the banks’ total balance of mortgages, down from 77% of new mortgages in February 2009.
Nevertheless the BOI´s Supervisor of Banks has actively intervened to reduce system risk:
- Variable-rate loans were limited from mid-2011;
- The LTV ratio was limited towards end of 2012;
- Capital adequacy and group allowances for doubtful debt were raised in early 2013;
- The PTI (Payment-to-income) ratio was also reduced in mid-2013.
By the end of 2014, the average monthly rent in the country had risen by 4.43% from the previous year to ILS 3,749 (US$ 969) per month. The most expensive rents can be found in Tel Aviv, with an average monthly apartment rent of ILS 5,746 (US$ 1,486) in Q4 2014, 53.27% above the national average. In Jerusalem, apartments rent at an average of ILS 4,072 (US$ 1,053) per month.
The Finance Ministry recently proposed to Minister of Finance- Moshe Kahlon a 20% purchase tax increase on housing for investment purposes, to discourage potential investors from buying rental apartments by making them less profitable. That way more apartments will be available for people who want to buy with the intention of occupying the property, since the tax wouldn’t apply to them. Kahlon appears to favour the proposal.
In the past 15 years, the homeownership rate in the country has been gradually declining as more households are renting due to the shortage of affordable housing. In 2008, the homeownership rate was 68.8%, down from 73% in 1995.
Though around 10,500 apartments were sold in March, 11% up from the previous month (Beersheva sales excluded) according to Globes reporting of Ministry of Finance statistics, the purchase of apartments by investors has generally been cooling off. On the other hand, says the Ministry of Finance, “since the beginning of 2015 there has been a high number, compared to recent years, of investors buying more than one apartment for investment over the past decade.”
Healthy economic outlook for 2015
Israel´s economy performed well during the last quarter of 2014, with annualized real GDP growth of 6.8%, way up on 0.2% the previous quarter, 1.7% in Q2 2014, and 3% in Q1 2014, according to the CBS:
In Q4 2014:
- Private consumption was strong, rising by 7.9% y-o-y.
- Government consumption rose by 8.5%.
- Exports surged by 12.7%, following meagre growth of 1.3% the previous quarter, while imports contracted by 2.9%.
Israel’s economy expanded by 2.8% during the whole year of 2014, a slowdown from the previous years’ expansion of 3.2% in 2013, 3% in 2012, 4.2% in 2011, and 5.7% in 2010, according to the IMF. The slowdown was partly due to the Operation Protective Edge launched by Israel in July 2014, which aimed to stop rocket fire from Gaza Strip to Israel. The operation lasted for more than one and a half month. Both parties accepted a cease-fire on August 26, 2014.
The Bank of Israel expects 3.2% GDP expansion in 2015 and around 3.5% in 2016.
In March 2015, the country’s unemployment rate was 5.3%, according to CBS. Despite the economic slowdown in 2014, unemployment fell to 5.9% from around 6.2% in 2013.
Inflation was -1% in March and February 2015, down from -0.5% inflation in January 2015, according to the CBS. In 2014, the country’s budget deficit was around 2.8% of GDP.
The BOI’s target of 1-3% inflation is seemingly unattainable this year as the central bank’s research department predicts -0.1% inflation in 2015. The target is only expected to be reached in 2016, when inflation is predicted to rise to 1.7%.
With the new finance minister , Moshe Kahlon, many new ideas have been discussed including rent control to protect the average tenant from rental increases over a long term lease, and hefty taxes imposed on buyers of multiple properties. These taxes and restrictions are not the answer to the long term housing problem. If the government really wants to cure the housing crisis, it will have to plan for the long term, starting with the elimination of unnecessary delays and prolonged red tape in providing building permits for new construction. Instead of taxing investors , the government should be providing tax incentives to builders who build affordable housing for young families. The growing population in Israel will continue to outweigh the available housing supply unless dramatic changes are made. Agricultural land will need to be rezoned and allocated for residential construction. The boost of the housing industry will also create more construction jobs and boost the employment opportunities as well. In summary, the government needs to start long term planning instead of trying to put bandaides on a problem that has grown out of control.
By Alyssa Friedland –RE/MAX Vision – Broker/Owner