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There's so much talk about how Israeli real estate is an island of stability in the roiling world market, that one has to wonder whether the very complacency contains the seeds of the next real estate bubble.

Bubbles form precisely under the conditions of utter faith in the future: the feeling that what was, will continue to be, and that an uptrend will stay around forever. And when a given market stands firm in the face of a planet-wide storm, as the local real estate market has, the danger of complacency is all the more acute.

The proof of its resilience could in and of itself inflate housing prices, thanks to misplaced belief that the market is immune to jolts. And when people think the market can only go up, they take bigger risks.

If we look at the track record of the Israeli real estate market, we find that it did indeed weather the global economic crisis undamaged. Last week research company Global Property Guide published a survey showing that out of the 32 countries it studied, 27 reported a decline in home prices during the first quarter of 2009, in inflation-adjusted terms. In 12 of these countries, housing prices fell by more than 10%, on top of the drop suffered in 2008.

Israel was one of the few countries where housing prices actually increased. During the first quarter of 2009, according to the Guide, housing prices rose by 6.4% compared with the first quarter of 2008.

In Britain, these prices retreated by nearly 19% in the first quarter; in the United States they fell by 19%; and in Ireland, they dropped by 11%.

But before we pin the gold star of stability on the local housing market's chest, we should ask ourselves why it's been so stable. And also try to determine what could upset that stability.

Israel's real estate market stayed stable because housing prices didn't shoot up during the last decade, as they had elsewhere. In Ireland, for example, prices rose fourfold inside two decades.

We all know stories about an apartment bought for $100,000 that the neighbor's Auntie Sara sold four years later for $200,000. But by and large, prices in the local market haven't changed that much in the last 10 years. The market stayed stable because local prices hadn't spiked, so the financial system was spared the spiral of over-leveraging for the sake of investment in property. None of which means that Israel can't develop a real estate bubble: We may, in fact, be approaching the point where that process is actually beginning to happen.

So, despite the global economic crisis, Israel's real estate prices climbed during the first quarter, and from unofficial figures, it's clear that the market is humming again after a hiatus. The rental market is red hot and prices in prime areas are rising anew.

One of the elements driving activity in the country's real estate market is low interest rates, which pushes investors toward property. Banks are paying less than 1% on deposits, regardless of the size. The Israeli public isn't used to such low interest rates, and therefore it will seek opportunities in the stock market, or the property market.

It is true that low interest rates aren't going to stay around forever, but their effect is going to be felt for a long time.

Investment in real estate is considered to be more conservative than investment in stocks, because over time, home prices are "supposed" to rise, and usually one gains fruits from one's investment in the form of rental income. Interest on mortgages is also as low as it's ever been, which is another reason people are taking out bigger loans now. For example, lowering interest on the loan from 6% to 4% means the person can borrow NIS 67,000 more and repay the same monthly installment.

The result is that the cost of money to buy a home has never been lower. When money is cheap, the tendency to take risks is greater - in the case of lender and borrower alike. Cheap money may drive the industry to greater activity. But it could make serious problems for both the borrowers and lenders in the future, when interest rates increase, and when defaults rise because of forbidding macroeconomic conditions, first and foremost rising unemployment.

What can be done to prevent a bubble from forming? From the perspective of the financial system, the rule of thumb is not to lend based solely on the perception that property prices can't drop. Low interest rates may allow a borrower to borrow more today than he or she could have, say, two years ago. But banks have to consider what the borrower's position will be when interest rates climb again.

From the perspective of the state, the real estate market needs to be reformed. The reform must be based on planning and selling state lands, and on developing better transportation infrastructure to make the country's center more accessible to the periphery, where land is still cheap. Also, deteriorating city centers are in need of restoration through urban renewal plans.