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Does the surge in prices of super luxury properties in Tel Aviv and Herzliya Pituah indicate what can be expected in the future? And what about the sharp rise in the prices of plots in Tel Aviv's new north and in Jerusalem? These questions provide food for thought for many in the real estate world - developers, agents, assessors and analysts, even though we are talking about relatively small market niches.

Two weeks ago, the deputy director general of the Bank of Jerusalem, Yaakov Sisso, expressed the thoughts of many of them: Prices of $15,000 and more per square meter for apartments in the luxury towers in different parts of Tel Aviv and the prestigious projects along Hayarkon Street that overlook the sea, as well as the neighborhoods in the center of Jerusalem, are not realistic. Sisso also included places like Herzliya Pituah, Ra'anana, the Ashdod seafront, Netanya and Eilat in this category.

What is common to all these places is that they have generated an independent market aimed at foreign buyers and the top echelons in Israeli society, and for some of them, prices have doubled in the past few years. "In my assessment," Sisso said, "in these places, the market has already surpassed the peak."

The steep rise in prices of plots in the new area of Ramat Aviv has given rise to the fear of a bubble. A hike of more than 70 percent in the price of land there in less than a year and a half has led to the assumption that this is a bubble and arguments about the issue are continuing.

What in fact is a real estate bubble and how can it be differentiated from a regular rise in prices? There are those who say that a bubble is merely a failure on the market, as happens in many market sectors. It is a dynamic in which prices climb without there being any real economic reason behind this rise. In a bubble, the price hike stems from the belief that prices will continue to go up and therefore it is worth paying the property's high price. Because of this reason, the process is generally accompanied by speculative and hasty deals. A regular rise in prices, on the other hand, is caused by changes in the standard of living and various economic indexes - wages, interest on mortgages, employment rates and so forth.

"One of the characteristics of a bubble is a price hike that does not reflect the profit yielded by the property. That is to say, the price of the apartment goes up but the rent that can be collected from it does not. This eventually leads to the property not having a practical economic value," explains the economist Prof. Daniel Gat. "A price generally goes up when a property suddenly becomes desirable because of the advantage of its location, because it has been upgraded, or because the nature of the surroundings has changed and has made it more profitable than in the past. In this case, the real value of the property increases and it is therefore possible to raise its rent and its price."

There have recently been "warnings of a bubble" in various parts of the world, starting with California and New York in the United States, via Calgary in Canada, and as far as Moscow in Russia. Internet sites have been set up to discuss this real estate bubble, books have been written on the subject, but there are still places where the rise in real estate prices is higher than what the economic indicators dictate - and this has been going on for several years without any sign of a drop. So is this an especially big bubble, or the behavior of a market that has not been properly analyzed? Why does Sisso warn about creating a bubble? "In some of the places, prices have trebled in the past three years," he says. "One cannot find any economic justification for such hikes and such prices."

The price hikes in Israel largely stem from the integration of affluent foreign residents whose income is not dependent on the Israeli market. At the same time, the places where the bubble is most likely to form are near to the areas where these foreign buyers acquire properties. There have also been steep rises in the prices of plots in these locations and the big question is whether there will be enough foreign or local buyers who can pay the high prices the contractors will demand for the properties once the projects are completed.

"In Eilat, for example, properties on the waterfront are fetching drastically higher prices because of foreign residents, but this has led to a rise in the prices of plots in other places where foreign residents are not buying. Developers have bought plots for exceptionally high prices in a series of tenders from the Israel Lands Administration. This is the result of non-rational behavior on their part and the question is whether they will be able to withstand these prices," says real estate adviser Yitzhak Nehushtan. He cites the example of private ("on the ground") houses that were bought up to about three years ago for $200,000 and for which the asking price is now $500,000-600,000. Developer Yossi Avrahami, for example, bought plots from the lands administration in good locations in Eilat's Shahmun neighborhood at prices that were double and more than those offered for other plots in the same tender.

Price rises of an average of 40 percent have been registered in Herzliya Pituah. "The phenomenon of a private buyer, who is prepared to pay an exceptional price for a home in Herzliya Pituah, is not something unheard of when talking about that neighborhood's good streets. This is particularly true since a price that was considered unusual five years ago is today considered normal and tomorrow will be low," says assessor Gilad Hameiri from Ehud Hameiri & Co.

A one-dunam plot in a good location in Herzliya Pituah, which was sold for $1.4 million two years ago, today is worth $2 million or more; one-dunam plots in extremely good locations have jumped from $2.5 million to $4 million. Nevertheless, Hameiri does not see this as testimony to the existence of a bubble. "Most of the buyers are foreign residents for whom such prices do not constitute a problem. They are not dependent on the Israeli economy, they do not buy the properties in order to sell them, and the economic issue is not their main concern," he says.

Noam Dzaldov, a partner in the Neot Shiran real estate agency, which specializes in upscale properties, also rejects the possibility that a bubble is forming in Herzliya Pituah. "Perhaps the average price in the neighborhood leaped by 40 percent," he says, "but there are different types of properties in this area and they cannot be discussed as if they were all the same. Certain properties, usually located in the less popular neighborhoods where supply is relatively great, went up by 10-15 percent. On the other hand, in Galei Kinneret Street, the most expensive street in Herzliya Pituah, price rises of 100 percent have been registered."

It transpires that the prices of the mega luxurious properties along Tel Aviv's Hayarkon Street, aimed mainly at foreign buyers, have influenced the properties that are intended mostly for the Israeli market. Following TheMarker's publication of the drastic price rises that have been registered in luxury properties, some deals for plots and old buildings have now been canceled; the owners of these properties have increased their demands.

The interface between foreign residents and affluent Israelis is apparently the most likely place for the bubble's creation. "There can certainly be a situation in which foreign residents start the bubble but Israelis continue it," says Gat. "One of the things that distinguishes the dynamics of a bubble from the dynamics of a regular market is the degree of speculation that surrounds them. Also, in a regular market you want to know that the apartment you bought has gone up in price, but you test this first and foremost according to the parameters of whether it suits your needs. In a bubble, however, the speculation becomes the main motive. People believe the prices will continue to skyrocket and this leads them to pay high prices." Sisso says he recently noticed that foreign residents have bought apartments in Jerusalem, Netanya and Ashdod for very short periods of time, have upgraded them and hastened to put them back on the market in what seemed to be speculative steps.

But there is no guarantee that this will last forever. The foreign residents arrived on the Israeli market unexpectedly, about three years ago, and they could leave just as unexpectedly. It is difficult to know how large the foreign market is, and the knowledge that tens of thousands of Jews from the U.S., Britain and France are capable of paying tens of thousands of dollars per square meter does not guarantee that they will indeed do so. The trend for religious Jews to acquire property in Jerusalem and the anti-Semitism in Europe, which leads Jews to buy properties along Israel's coast, may wane in the future.

One of the central targets of those warning against the formation of a bubble are the luxury towers in Tel Aviv. Three years ago, prices of $5,000 per square meter were considered average for these towers. Today, the threshold for entry is $6,500 per square meter while the average is around $8,000 per square meter - a hike of 60 percent. Peak prices are fetched by the penthouses and the luxury apartments along Hayarkon Street, where prices have doubled in the past three years and have now reached $15,000 per square meter and more. And what about the new area of Ramat Aviv and Kohav Hatsafon where plots have gone up from land rates of $130,000 to $230,000 per housing unit? Assessor Yirmiyahu Aloni believes there are signs of a bubble here. "Something is happening in Tel Aviv's new north that we don't understand. To me it seems to be some kind of hysteria. We are talking about a specific problem not matched anywhere else in Israel. The property market in other Tel Aviv suburbs is on the rise, but not in that way."

Others are of the opinion that there is no bubble but that this is the product of an entire sector that has suddenly become rich, particularly those who have some kind of connection with the capital market, which has shot up a great deal recently. "The apartments in northern Tel Aviv are of an extremely high standard compared with apartments in most parts of the city. Their planning is excellent and people who live in the city and have the means to buy these apartments are happy to move there," says Gat.

And that is precisely the problem with a bubble: Even if such a creature does exist, until it actually bursts, there will be plenty of people who are happy to jump onto the bandwagon of the rising costs and buy properties at irrational prices while offering very rational arguments.

A minute later, they will explain to everyone how the writing was on the wall. Or not.