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Jan 10, 2012


Israel's housing market under pressure


Israel house prices

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 2008
  • Property prices rose by 22.4% in 2009
  • Property 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.

A housing bubble!

Israel average price owner occupied dwellings graph

The Israeli housing market grew sluggishly in the past decade. From 1999 to 2007, house prices in Israel rose by just 19% while the CPI increased by 24% over the same period.

However, house prices have been climbing rapidly in the past three years. This has raised questions of whether Israel is now experiencing a housing bubble.

Some of the factors that are inflating house prices are the following:

  • As a result of central bank’s actions of lowering interest rates in the past three years, housing demand increased rapidly causing house prices to soar.
  • The heightened activity by property acquisition groups has inflated apartment prices, according to the Real Estate Appraisers Association (REAA).
  • Israel’s housing market continues to suffer from a supply shortage. The inability of supply to satisfy demand caused house prices to surge from 2008 to early-2010.

Conflict-stricken housing market

Despite the global crisis, Israel enjoyed double-digit house price rises over the past three years. The highest house price increase was recorded in Tel Aviv, at 46% between Q1 2008 to Q4 2009. Only the Northern district registered a house price drop of -2.3% over the same period. The average price in Israel rose 27.7% between Q1 2008 to Q4 2009.

In the year to end-Q1 2010, Tel Aviv saw the highest house price rise, at 32.3%, followed by the Central district with a price increase of 27.7%. In Jerusalem, house prices rose by 17.4% over the same period.


CHANGES IN AVERAGE PRICE OF DWELLINGS (%)

Second Intifada (Q3 00 - Q2 03)
(Q2 03 - Q1 06)
Israel - Hezbollah War (Q1 - Q4 2006)
(Q4 06 – Q4 07)
Global economic crisis (Q1 2008 – Q4 2009)
(Q1 2010 y-o-y)
Israel

-6.47
28.09
-11.60
4.90
27.72
15.93
Districts
Tel Aviv
-16.60
25.50
-12.60
22.37
46.02
32.32
Center
6.77
10.21
-12.12
16.22
44.36
27.68
Southern
11.96
-0.78
8.93
6.84
41.53
23.34
Jerusalem
-3.86
36.77
-6.05
5.05
20.98
17.40
Northern
1.57
0.07
-8.00
-4.40
-2.31
17.08
Haifa
-10.34
-0.68
-10.26
-8.47
29.82
15.35
Metropolitan Areas
Sharon
1.81
26.25
-10.08
9.33
39.90
21.41
Gush Dan
-2.24
5.22
-5.70
5.80
37.00
13.28
Qrayot Haifa
6.15
-6.26
-2.81
-10.51
16.29
12.92
Source: Central Bureau of Statistics

House prices rose 28% (24.6% in real terms) between Q2-2003 and Q1-2006, due to the economic stability brought by the success of the electronics industry, investments and financial aid from the US, by inward invetment, and by the improved security situation.
The war between Israel and Hezbollah, which erupted in July 2006, however rocked an already volatile political environment. Consumer and investor confidence dropped. Both supply and demand for housing fell.

The average price of houses fell 11.6% from the peak level of ILS 793,800 (US$211,095) in Q1 2006 to ILS 701,700 (US$186,603) in Q4 2006. Although the war formally ended in August 2006, the lingering uncertainty over the peace and order situation led to a weakness in the housing market.

During 2007, the housing market recovered slightly with 4.9% y-o-y price increase (1.5% in real terms). However, the recovery was interrupted by the rising tensions with Iran and with the Hamas-controlled Gaza Strip. Israel’s continued expansion of Jewish settlements in East Jerusalem and in the West Bank also increased tension.

Tel Aviv’s housing market suffers the most whenever the country is in conflict. With the Israel-Hezbollah war, house prices fell 12.6% from Q1 to Q4 2006. In contrast, the Southern district, relatively unscathed by the conflict, registered an 8.9% price increase over the same period.

Property prices in other districts have partially recovered since the cessation of conflict at the end of 2006. Surprisingly, Tel Aviv recorded the highest house price rise of 22.37% y-o-y in 2007. The national average price also rose by 4.9% over the same period.

Shortage of affordable housing

Israel housing starts and completions graph

In 2009, the total quantity demanded of new dwellings was 36,500 units, up 14% from 32,015 units in 2008, based from the latest figures released by the BOI. In the first half of 2010, the total demand for new dwellings in the country was 18,220 units, almost the same as in the first half of 2009.

In reality, the actual quantity of new dwellings sold was just half of the total demand, or 9,996 units in the first half of 2010. This was mainly due to the shortage in available supply of apartments in the country. In 2009, the total number of new dwellings sold was 19,716 units, up 17.8% from 16,733 units in the previous year.

From January to April 2010, housing completions totalled 9,501 units, down 15% from the same period last year, according to the BOI. In 2009, housing completions rose 6% to 32,258 units from the previous year. Of which, 83% of the total completions were from the private sector.

Total housing starts were 11,690 units for the first 4 months of 2010, up 15% from the same period last year, according to the BOI. In 2009, there were a total of 34,281 housing starts, up 6% from 2008. More than 30,100 units, or 88% of the total housing starts were from the private sector.

To deal with the shortage of affordable housing, the Housing Ministry and the Israel Land Administration (ILA) have marketed tenders for about 24,600 housing units from September 2009 to June 2010.

Mortgage rates are falling

Israel interest rates

Mortgage interest rates have generally declined since 2003. In June 2010, the average mortgage rate was 2.31%, down from 6.7% in January 2003.

To moderate the effect of the global crisis on the country’s economic growth, the Bank of Israel reduced the key interest rate to a record low of 0.5% in April 2009. The central bank cut the key rate by a total of 375 basis points from October 2008 to April 2009.

From September 2009 to April 2010, the central bank raised the benchmark rate four times, finally to 1.5% in April 2010, as the Israeli economy recovered from the global crisis. Then in August 2010, the key rate was again raised to 1.75%, in a move to cool Israeli house prices and prevent a housing bubble.

Over the past two years, house prices in the country have risen by about 27% (even more than 40% in some districts). The central bank has warned that “if prices continue to rise at the current pace, they are likely to deviate from the level consistent with the basic economic conditions.”

Sluggish mortgage market

Israel housing credit graph

The size of the Israeli mortgage market was about 20.3% of GDP in 2009, slightly up from 19.1% of GDP in 2008. Though mortgage interest rates have generally declined since 2003, the size of the mortgage market has barely risen, mainly because of the political and economic uncertainty.

From 2002 to 2006, the size of the mortgage market has generally declined from 19.2% of GDP in 2002 to 17.2% of GDP in 2006. Then for the last 3 years, the mortgage market grew sluggishly to 20% of GDP (as of May 2010).

In 2009, the total housing credit to households was ILS155.84 billion (US$41.44 billion), up 12.5% from ILS138.49 billion (US$36.83 billion) in 2008, according to the BOI. As of May 2010, the total housing credit was ILS162.14 billion (US$43.12 billion).

By end-2009, mortgages constituted about 50% of households´ total outstanding debt. The debt to disposable income ratio was 60% in 2008, as compared to 110% in the US and the UK.

As a result of the decline in inflation rates in recent years, the share of CPI-indexed mortgages to new mortgages taken fell to 35% in 2009 from 61% in 2003. Though, its share to total outstanding mortgages remains high at 66% by end-2009.

In February 2009, unindexed floating-interest rate mortgages reached a peak of 77% of new mortgages taken, thanks to low interest rates and the expectation that it would continue to drop. However, as interest rates started to rise in H2 2009, the share of unindexed floating-interest mortgages to new mortgages gradually declined to 51% in December 2009.

Rents rising, homeownership rates falling

Apartment rents have risen sharply in the past three years. In 2009, monthly rents in Israel rose by about 15.3% from the previous year. In Q3 2009, the average rent for apartments was ILS2,700 (US$718) per month.

In Tel Aviv, the average monthly rent was ILS3,760 (US$1,000) in Q3 2009, the highest in the country and about 39% above the national average. On the other hand, Haifa has the cheapest rental properties, with an average rent of about ILS1,640 (US$436) per month. In Jerusalem, apartments were rented at ILS3,210 (US$854) per month.

According to the Ministry of Construction and Housing (MOCH), the rise in rents in recent years was mainly due to the strong demand for apartments for investment purposes, fuelled by falling interest rates.

In the first half of 2009, about a third of all apartment purchases were for investment purposes, up from about 22% in 2002. In Tel Aviv, apartment purchases for investment purposes reached a high of 55%.

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.

Gross rental yields on apartments in Tel Aviv vary from around 4.64% to 5.06%. These yields are moderate. Yields are highest for 120-square metre (sq.m.) apartments.

Israel’s resilient economy

Israel GDP growth and inflation rate

Despite political dramas and security threats, Israel’s economy has been growing rapidly. The country has capitalized on its highly skilled and educated workforce, on enormous financial aid from the US. It has built a strong niche in high-tech and IT start-ups, with its position recently strengthened by the discovery of oil and natural gas.

In May 2010, Israel became a member of the Organisation for Economic Co-operation and Development (OECD), the exclusive rich-man’s club.

GDP growth for 2010 is projected at 3.9%, with the recovery expected to be sustained at 4% in 2011 - higher than the projected average OECD GDP growth rate of 2.3%. Unemployment in Israel is also expected to fall to 6.1% in 2011, from 6.4% in 2010, and 7.65 in 2009.

Inflation is projected to remain stable at 2.5% in 2011, at par with 2010’s 2.6%. Consumer prices rose by 4.6% in 2008, and by 3.3% in 2009.

Political instability persists

Israel continues to suffer from political instability. Recent political issues include the following:

Israel settlers in occupied territories
  • The killing of nine Turkish activists in the Gaza flotilla attack in May 2010, which was branded by Turkey’s prime minister as a “bloody massacre”, has received international criticism and tarnished Israel-Turkey bilateral relations. It was feared to spark political crisis.
  • The current UN probe on the assassination of former Lebanese premier Rafiq Hariri in 2005 and the recent clash between Lebanese and Israeli forces along the Lebanon-Israel border, which resulted in the deaths of at least two Lebanese soldiers, a Lebanese journalist, and an Israeli army officer, instilled fears of renewed violence between the two countries.
  • Endless Israeli-Palestinian conflict over Jewish settlement in the occupied territories. In March 2010, the Israeli government announced to build 1,600 housing units in East Jerusalem, despite Palestinian opposition and international criticism. Then in July 2010, the government approved the construction of 32 new housing units in Pisgat Zeev. In addition, 22 new housing units were also approved in Beit Hanina and 18 units in Beit Safafa, Sur Baher and Issawi´ya. These settlements could undermine the peace process because of the strong Israeli security presence that they entail, and the intense sense of injustice that they provoke among Palestinians. In fact, 237 Israeli settlers were killed by Palestinians while 45 Palestinians were killed by Israeli settlers in the West Bank and Gaza Strip between 2000 and end-2008.
      





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