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[TEL AVIV] 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 US$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 US$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 per cent recently from as low as 2 per cent 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 per cent, 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.