Two weeks ago, the real-estate market received a nasty shock: The housing price index for March-April rose by 1.2% and hit its highest level since the end of 2013. This made the rise in housing prices in the first quarter of 2016 2.1% – an annual rate of over 8%.
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Since the most recent Knesset election in March 2015, housing prices have risen by 7.8%, which is not what the government wants to hear. New data shows that the public feels pressured to buy quickly, even as prices continue to climb.
One of the main factors that will determine whether prices fall or not is the time it takes to sell homes. The longer a unit is on the market, the more willing the sellers and developers become to compromise over price. Conversely, the less time it takes to sell, the more incentive sellers have to raise prices.
There has been an increased public demand recently for newly built homes, and the time it takes developers to make a sale has fallen. A large percentage of these units are sold within two months of going on the market, which means that, for now, contractors have little incentive to lower prices.
During years in which buyers were less pressured to purchase homes – such as before 2008 – a new home had a median time on the market of seven to eight months. Starting in 2008, these median waiting times have fallen: down to four to five months in 2008-2009; 2.4 months in 2010; and to a record of only one and a half months in 2011, when new homes were being snapped up quickly. And in the second and third quarters of that year, this period shortened still further, to only 1.3 months.
The change began in 2012, with the median selling time for new homes rising to 5.7 months. In 2013 – a very lively year for residential real estate – it fell again to 4.4 months. And in 2014, then-Finance Minister Yair Lapid’s push for zero value-added tax on new homes caused the market to freeze for months, but over the year the median sales period was 5.1 months. Last year, with the entry of Moshe Kahlon into the Finance Ministry, the figure fell to 3.6 months, and in the third quarter of 2015 the number was just 2.3 months.
In the last quarter of 2015 and the first quarter of this year, the median wait for a sale rose to over 4 months. But the market is still at a similar level to that in 2011, which was one of the most high-pressured for home buyers.
Dr. Avichai Snir, an economist from the Infinity Investment Group and a lecturer at the Netanya Academic College, says the thing that stands out the most in the chart of median times for the sale of new homes is the huge volatility.
To a great extent, this volatility stems from government intervention, which confuses the public and developers, as it tells the public to wait at one time and then to rush and buy at another, he says.
“As volatility grows, prices also rise, because volatility creates risk – and we pay for risk. So this chart shows the way in which the government’s announcements and the changes in policy raised the risk premium in the real-estate sector and contributed to the rise in prices. In other words, how the government’s announcements about lowering prices contributed to the rise in prices,” said Snir.
So it’s no surprise that the private home buyer, and even groups of buyers, have little ability to put pressure on builders to lower prices more than the going rate (no more than 5% of the official list price), and in fact it’s almost nonexistent. That’s why home buyers who negotiated with the sales people in Rosh Ha’ayin – situated east of Tel Aviv, and one of the most in-demand locations for new homes, both in regular construction and for Finance Minister Moshe Kahlon’s two lower-price programs – report little interest in meeting their requests, as well as almost a complete refusal to compromise on price.
“Today, developers are in no rush to provide discounts like in the past. If once you could receive a 4% discount on the price of an apartment, today that discount has been cut to 2%,” says Ronny Cohen, the CEO of Eldar, which markets homes.
“This is the result of the creeping rise in prices, which is expressed in two ways: First, an increase in the catalog price of homes; second, a reduction in discounts.
“Of course, the situation changes from place to place and in a neighborhood where 15 contractors are operating, and 14 of them give a 5% discount, it’s hard for the 15th to give less than they do,” he added.
Even higher prices
The buyers pressure index (in short, the “pressure index” of TheMarker’s real-estate section) is an index based on data from the Central Bureau of Statistics, and which uses the weighted number of new homes built by contractors that are sold within two months of going on the market.
This index measures how much financial “breathing room” the developers have, provided to them by the home-buying public. The more “under pressure” buyers are – i.e., they’re in a hurry to buy a new home as soon as it goes on the market – the less pressure exists on sellers to lower prices. The lower the “pressure,” the more willing contractors will be to lower prices.
Today, about 40% of new homes are sold within two months of being put on the market. In such cases, developers have a clear incentive to raise prices. The index shows that in 2006 and 2007, when the real-estate market was much cooler than today, about 3% of new homes were sold within two months. The higher prices climbed, the greater the pressure on the home-buying public. This was especially clear in 2009 and 2010, when housing prices rose at their fastest rate. This pressure continued into 2011 – the year in which the social protest movement erupted in the summer and protest tent camps were erected in Tel Aviv.
A possible explanation for the effects of the pressure index is that the decision to buy a home is not a capricious one, and the buying process can take a long time. It’s reasonable to assume that people who decided to buy a home in 2010 mostly went through with the decision in 2011 – without the social protests providing any influence – and the moment they found an appropriate project, they rushed to buy a home there.
Another phenomenon characterizing that period was that many of the young couples who hoped real changes would be implemented in the wake of the protests and that the government would increase its support for home buyers – or, alternatively, lower housing prices for them, possibly in the form of zero VAT – stopped buying while they waited for the results. Consequently, the market went into deep freeze for a number of months. Once the recommendations of the Trajtenberg committee on lowering the cost of living were released, and the public understood that its long-term recommendations would not help their generation, the home buyers once again descended on the real-estate market in large numbers – usually with the aid of their parents.
As a result, 2011 was the year with the greatest “pressure” on the part of home buyers in the past decade, and almost 50% of new homes were snatched up within two months of being put on the market. Paradoxically, it was during the period of the social protests that the behavior of buyers caused, to the greatest extent, a rise in housing prices.
A year later, the markets calmed down a little. From 2012 to 2014, the index fell to about 33%. In 2013, the numbers rose slightly, but in 2014 the index returned to its 2012 levels – mostly due to the expectations that the zero VAT law would be passed (a proposal that gave hope to many young people that they would finally be able to own an apartment, with the help of the government).
Subsequent disappointment that the zero VAT law didn’t pass sent the index back up to 40% in 2015. Considering that a record number of new homes were sold in Israel last year, this is an incredible number of homes to sell so quickly – which only led contractors to raise prices even higher.
At least some of the change in the pressure index and the drop in the median selling time for new homes stems from Kahlon’s new programs to lower prices, argues Ronny Cohen.
“This campaign, which allocates all the state land to those [who do not own their own homes], caused a rise in private land prices, a fear among the public that the supply of new apartments to the general public would be reduced – so [it too led] to an onslaught on apartments,” he said.
Snir begs to differ. He compares the behavior of home buyers facing the high taxes Kahlon has leveled on those buying real estate for an investment, and their behavior in light of the gradual rise in mortgage interest rates – even though the Bank of Israel’s interest rates have remained almost unchanged for a long time.
Raising taxes on investors caused a slight increase in the time it took to sell new homes, but this rise stopped, he said. At the same time, mortgage interest rates are creeping up, but this has yet to be seen in demand, even though it could lead to a large rise in financing costs for buyers.
“If this situation continues, a problem could arise as a result of the combination of a rise in costs, together with the attempt to focus on the housing market for first-time buyers and ignore the marker for those moving up and investors, which is continuing to boil – because people believe that improving their home is the only way to save money in a period of zero interest rates,” added Snir.
“The likely scenario is either another jump in prices or political frustration, which will bring about a change in policy once again,” he said. The less likely scenario is a strong rise in interest rates, which will drive buyers out of the market in one fell swoop. And then, when the prices stop rising so quickly, the bubble will burst, concluded Snir.