Tel Aviv is one of the 24 big cities in which the prices of apartments are inflated, despite a cooling off in the past two years, UBS economists say in their annual Global Real Estate Bubble Index, which is covering the Israeli city for the first time.
The bank warns against investing in Tel Aviv, and judging by reports from the market, most investors have apparently already internalized the message. Andrea Tomasini, head of UBS Wealth Management in Israel, Russia and the CIS, said that “rates of growth in real estate prices continued to slow down in most of the cities. In Tel Aviv the prices were already under pressure since 2015, and the imbalance was reduced. Although new opportunities are likely to arise, we recommend that investors check the market carefully.”
The prices of apartments in Tel Aviv are not included in the most dangerous group described by economists as a bubble, but are among a second tier group in the ranking, whose prices are described as “overvalued.” On this list Tel Aviv is in ninth place out of 10, after Sydney, Australia and above Madrid. In terms of work years, prices in Tel Aviv are equal to those in New York and Tokyo: It takes 11 years of work by a skilled service worker to pay for a 60 square meter (650 square feet) apartment. In Hong Kong an apartment of similar size requires 21 years of work.
In the past 30 years Tel Aviv has experienced the steepest price increase among the cities surveyed, in spite of the price stabilization in the past two years, which according to the bank’s economists was due to the increase in interest on mortgages. The economists do not mention additional steps taken to moderate the prices of apartments, such as the Mekhir Lamishtaken (price for new residents) program and the increased taxation on residences purchased for investment purposes.
However, the survey notes that the price level in Tel Aviv is in relative decline, and that in the past two years the price index dropped from 1.32 to 0.78 – with an index of 1.5 representing the lowest level defined as a “bubble,” while the level for a “fair-valued” definition is less than 0.5.
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The survey presents the principal cities in which a real estate bubble has developed in recent years. Heading the list of bubbles is Munich, which ousted last year’s record holder, Hong Kong, from first place. In second place is Toronto, followed by Amsterdam, Hong Kong, Frankfurt, Vancouver and Paris. The list includes two cities in Canada and two in Germany.
According to the survey, the decline in prices in London has caused a decline in the risk level, and the city has left the “bubble” list in favor of the “overvalued” list. But London is a unique example, influenced by the Brexit crisis. Other than London, none of the cities surveyed in the bubble group registered a decline.
The price increase in Frankfurt caused a jump from a comfortable place on the overvalued list to the top of the bubble cities. In Paris, too, there was a price increase, and the city moved from the list of overvalued cities to the list of the bubble cities. Moscow and Madrid jumped from “fair-valued” to overvalued.
Only four cities are included in the “fair-valued” zone in 2019: Singapore, Boston, Milan and Dubai. Bargain hunters are invited to try their luck in Chicago, the only city in the survey in which the prices are lower than the value of the assets, and in the past year prices have even declined there. During that period there was no price rise in any of the cities in the United States surveyed by the economists.
In Europe, on the other hand, lower interest rates and an expansion policy have caused a price increase in all the cities surveyed, and some even entered the bubble zone. Real estate prices in Europe are influenced by contradictory trends of lack of growth and fear of a slowdown, and on the other hand an aggressive monetary policy of money transfers and even negative interest on savings, in an attempt to stimulate the economies.
According to Mark Haefele, Global Chief Investment Officer UBS Wealth Management, economic uncertainty is stronger than the effect of plummeting interest rates. But in certain parts of the Eurozone, the low interest rates have nevertheless helped push real estate prices into real estate bubble-risk territory.