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The dollar is plummeting but prices remain stable By Sarit Menahem Tags: dollar, bank of israel  The Bank of Israel decided on its dramatic dollar buy-up last week after the greenback plunged about 20% since the beginning of the year. The Consumer Price Index has felt the effects of the bruised dollar on the Israeli economy. Despite the spiraling price of commodities worldwide, the rise of prices in the local economy has remained modest, because the plummeting dollar is offsetting inflation. The principal reflection of the weakening dollar against the shekel in the CPI is in the cost of housing, transportation, communications and home maintenance. When all other market conditions except the dollar remain stable, these products from the consumer basket become cheaper. Advertisement "Contrary to popular belief, the price of housing affects the housing component only indirectly," says Dr. Michael Sarel, who heads the Economics and Research department at Harel Insurance and Finances. The basket of products in the consumer price index, he notes, does not measure the price of residential real estate - although rent rates are later reflected in real estate prices, he says. "Even though there is a feeling that everyone is moving to shekel rent rates, we continue to speak in dollars, even in new rent contracts," he says. "Plus, when shekel contracts are signed, they are affected by fluctuations in the dollar exchange rate, because homeowners continue to think in dollar terms and adjust the shekel rent rates accordingly." Prices of flights and outgoing tourism are still quoted in dollars, and decline with the weakening of the dollar against the shekel. Regarding the transportation component of the CPI, Sarel points to the products affected by the dollar: fuel, transport, flights and tourism. "The price of fuel is regulated, and calculated at the end of every month based on an equation that incorporates the dollar exchange rate. The fall of the dollar is reflected in lowering of fuel prices." Another item directly exposed to changes in the dollar is home maintenance, including electricity, water and heating fuel. "The price of electricity is also regulated, and set based on an equation that includes the cost of production of electricity, including the cost of coal, oil and transport, which are quoted in dollars. If the dollar weakens against the shekel, the price of producing electricity goes down, as does the cost of electricity in the local market." Arik Mirovsky adds: The price of luxury apartments will go down, and low-priced home prices will stabilize, and perhaps even drop slightly. Office real estate will be unaffected in the short term. In a word, that is what lies in the future for Israeli real estate following the financial crisis in the U.S. that is affecting markets worldwide. There is a connection between the economic collapse in the U.S. and local real estate prices, although not a direct one. One of the central engines of the local real estate market over the past four years has been foreign residents who provided a shot of adrenalin to the Israeli real estate market, that until 2004 had been in the midst of a deep recession. Israeli entrepreneurs recognized an opportunity and made preparations for the onslaught of foreign residents. In Jerusalem and Tel Aviv more than 10 luxury residential towers are under construction, which include hundreds of apartments meant primarily for foreign residents, and many more are in planning stages. But by the end of 2007, a slowdown of the influx of luxury consumers had become evident. As global markets fall, it is reasonable to assume that their numbers will decrease even further. "Although the epicenter of the crisis is in the U.S., Israel is included in the circle of countries that are affected by it, and it can't be ignored. The sharp decrease in the dollar exchange rate has lowered the motivation of Americans to buy an apartment here," says Erez Cohen, chairman of the Real Estate Appraisers Association in Israel. And investors who have lost millions will be even less inclined. Appraiser Yaron Spector notes that the huge price increases in luxury residential real estate that began in 2004 were stymied last year, and reports that deals closed in recent months have remained at the same price level - about $8,000 per square meter. "We haven't seen prices going down yet, although I expect that the weakening dollar will have a greater affect on the market in Jerusalem, preferred by religious Americans, more than the Tel Aviv market, which tends to attract European buyers," he emphasizes. Low-priced apartments are a separate market entirely. Although some realtors have noted a certain slowdown in this market, Spector says that unlike the luxury market, prices of middle class market apartments in peripheral neighborhoods near Tel Aviv have continued rise. The situation in Tel Aviv is completely different. Cohen believes that prices have reached unsustainably high levels that cannot be maintained "irregardless of whether U.S. banks are crashing." These price levels are a matter of concern to mortgage banks, he says. Banks are demanding more conservative assessments. "The general feeling is that housing prices in certain areas are very high, and the banks don't want to take chances." Rina Rozenberg adds: The cost of electrical appliances has dropped between 5% and 10%. Chains and importers offer the sliding dollar exchange rate as an explanation, but it should be kept in mind that older model electronics and electrical appliances tend to fall when newer ones hit the market. Nor are the prices of all products dropping because of the falling dollar, since products like refrigerators and washing machines are manufactured for the most part in Europe, and are unaffected by the dollar. The food sector has not experienced any price dip, because a large part of the products sold in grocery chains in Israel are produced in Israel or Europe. One senior manager of a grocery chain says that with the overall increase of the price of raw materials such as wheat, flour and sugar, the dollar exchange rate is meaningless. The only reason we are not seeing a sharp increase in the price of these products he says, is that the chains are holding down prices before Passover holidays, but they can be expected to rise over the holidays. Bookmark to del.icio.us   Free interpretation Yesha rabbinical council ruled it is forbidden for Jews to employ Arabs. Little Africa Tel Aviv is setting up a tent city to improve the living conditions of African refugees.

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