The Israeli real estate market is all aflutter these days as the government, in a desperate effort to bring rising prices under control, regularly unveils ambitious new initiatives of one kind or another.
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Most of the action comes from the finance and housing ministers, who were once talking about prices falling already at the start of this year and more recently have suggested they will more likely stabilize, and not until the end of the year. Prices will go down in 2015, they say.
Could the new, more modest forecast have some foundation?
The history of price upswings is encouraging. A price surge that began in the late 1960s lasted six years, while one that started in 1988 lasted nine years. There’s no law governing the duration of real-estate price cycles, but the one we are in now is in its eighth year, which would suggest that it’s due to end soon.
The only question is how that will happen. There are two types of scenarios – the “happy” conclusion that sees prices declining in a gentle, controlled fashion, allowing more people to enter the market and own a home. In this scenario, the banks that have made loans to buyers and builders are not harmed.
The second ends badly, with prices collapsing and everyone in the markets losing out.
Right now – and it’s all to the government’s credit – serious efforts are under way to bring down prices the happy way. The coming year will see whether those efforts succeed.
The first is Finance Minister Yair Lapid’s plan to eliminate the value-added tax on new homes for certain categories of buyers. Currently, this is envisioned as meaning first-time buyers – so-called young couples even if they are neither, but it could be extended to people who are selling one residence for another. The second is the “target pricing” plan promised by Prime Minister Benjamin Netanyahu, which aims to set the final prices to home buyers when the state auctions off land for residential building to developers.
Can either work? The Central Bureau of Statistics reports that home prices rose 6.3% in the 12 months to January. But an review by TheMarker of Israel’s 16 biggest cities shows that in the 12 months to April, prices in most neighborhoods rose much less. While in a few areas they rose 5% or more, in others they were stable.
See page 15 for a survey of conditions in four cities with significant English-speaking populations.
It determined that in the northern parts of Tel Aviv, demand will remain strong despite sky-high values, but prices will rise only moderately, if at all. The stock of available housing in the northwest of Tel Aviv is limited, especially for properties with a sea view. In the northeast, however, construction is ensuring a steady growth in supply.
In the south, prices still have room to rise, with increase expected of 5% to 10%. South Tel Aviv remains popular with young buyers and investors.
In Jerusalem, prices in predominantly secular neighborhoods will remain steady but continue to rise in Haredi areas. New building is insufficient to meet demand and foreigners remain active buyers, pushing up prices at the luxury end.
In Modi’in prices are likely to remain stable, with a possible decline of up to 5% in the short term if the Lapid VAT plan is enacted and more in the longer term if the targeted price program is put into effect, as well. Ra’anana prices will be dictated by high-quality building projects.
Nationwide, however, home prices appear to be plateauing because the market is played out.
Many potential buyers simply don’t have the equity to buy a home at current prices, and investors can’t raise rents enough to earn a reasonable rate of return of their property assets.
Another factor weighing on buyers is the Bank of Israel’s increasingly onerous restrictions on new mortgages. These tougher rules are strangling many buyers, forcing them to delay purchases or to settle for a smaller, cheaper home.
At least in 2013, there seemed to be a lot of excess cash ready to put into property, although the source of this money is not readily evident. It is reasonable to assume that much of it – especially the money young couples seemed to have available – came from parents and grandparents. Another source could be from undeclared income in the black market. Indeed, the treasury thinks as much.
“Another finding that is interesting to note regarding investors in Jerusalem [real estate] in the final quarter of 2013 is the high proportion (30%) of buyers who don’t reporting having any income (as a salaried employee, pension or from being self-employed),” the Finance Ministry said in a recent report. “In light of the Bank of Israel’s restrictions on how much of a buyer’s income can go towards repaying a mortgage, it is likely that these buyers have no need of a mortgage at all. It seems likely they have income they are not reporting to the tax authorities.”
TheMarker assumes that the government’s two big real estate initiatives – the zero-VAT and targeted pricing plans – will go into force later in the year. How these new undertakings will work is still unclear, subject to political negotiation and to technical problems that could make them very different from how they were first proposed.
The government estimates that some 10,000 to 15,000 homes will be sold every year within their frameworks. Given the size of the market, that alone will not affect prices nationally but it could on a local level, especially in areas where the state undertakes its “umbrella plan” to coordinate massive building programs with city governments.
These initiatives are unlikely to carry enough weight to bring down home prices in the immediate future. But they might help stabilize them at current levels or limit price increases. Towns in the periphery, as well as neighborhoods where demolition and redevelopment (“pinui-binui”) projects are being promised, will likely see home prices rise slightly beyond the national average. Where the government’s new undertaking will have a more pronounced effect is in causing the number of home sales to decline.