The turnaround in Israel's housing market seems to be gathering steam: Recently published figures show sales of residential units dropped 32% in August, to just 6,000. It now appears that the housing market in the third quarter of 2011 was the weakest it's been since the deep recession of 2002.
A TheMarker survey of 800 real-estate industry professionals at the end of September found that 57% expect property prices to decline in the near future, 36% expect them to remain unchanged, and only 7% think they will rise.
Changes in public expectations have a significant influence on the market. Over the last few years, Israel's real-estate market has been grounded on the assumption that prices will keep rising or at least stay flat. As long as the market was dominated by these expectations, the throng of buyers kept growing.
Change in expectations doesn't come suddenly; it usually begins with the professionals - builders, architects, bankers and sub-contractors - who get an indication from increasing numbers of frozen projects. At first, sales drop while prices remain high. Sellers aren't eager to cut prices and try to determine if the slowdown is just temporary. But as more time passes and sales don't pick up, builders begin getting weighed down by growing inventories of unsold units and begin offering discounts. Price reductions on new home sales also affect prices in the resale housing market.
A claim frequently heard over the past few years was that the Bank of Israel's low interest rates were the reason for the inflated home prices. Warnings of this nature were again heard in the past few weeks after the central bank lowered its rates from 3.25% to 3%.
Despite the important effect of interest rates, changing market expectations might have even a greater effect this time. Recent experience in the United States and Europe shows that low interest rates alone aren't enough to rejuvenate an over-inflated real-estate market.
Home prices in the United States have continued to fall despite infinitesimal lending rates in the last three years. When expectations call for declining prices and capital losses from property investments, buyers won't sign deals unless they get a discount. When this situation coincides with a market that has been overheated for a number of years, the ability of low interest rates to re-inflate property prices is much more limited.
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