Israel

Israel’s housing market is poised for a hard landing, despite two recent Bank of Israel (BoI) interest-rate cuts.   In the third quarter of 2011, the average price of owner-occupied dwellings dropped by 3.27% (-3.65% inflation-adjusted) from the previous quarter, according to the Central Bureau of Statistics (CBS), the second consecutive quarterly house price fall. In Q2 2011, there was a 0.83% house price decline (-2.08% inflation-adjusted).

Property prices in Israel have risen rapidly in recent years, driven by low interest rates, despite the global meltdown:
The average price of owner-occupied dwellings rose by 4.1% in 2008Property prices rose by 22.4% in 2009Property prices rose by 17% in 2010
The average owner-occupied dwelling price was ILS1,081,100 (US$284,941) in Q3 2011.

Now the slowdown has hit.  Israel’s economic growth has declined steadily from 7.2% in Q4 2010 to 3.4% in Q3 2011, as export demand has waned.  From January to October 2011, the number of private sector dwellings sold fell 16% compared to the same period last year, at 12,289 units, according to the BoI, despite the number of dwellings supplied rising 12% from a year earlier.

In response, the Bank of Israel slashed its key rate by 25 basis points to 2.75% in November 2011, after  September 2011’s key rate cut from 3.25% to 3%.

Nevertheless, Israel’s economy is fundamentally strong.  It withstood the global crisis, with real GDP growth of 4% in 2008, 0.84% in 2009, and 4.85% in 2010, and (provisional estimate) 4.8% in 2011. In the second quarter of 2011, the unemployment rate was at a record low of 5.5%, with inflation only 2.6%.

However in 2012, the OECD expects Israel’s economy to slow, with a projected real GDP growth rate of 2.9%. Likewise, the Bank of Israel has revised its economic growth projections for 2012 from 3.2% to 2.8%.

Property prices in Israel are expected to continue falling in the coming months, and construction activity is expected to contract sharply.

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