Inflation in Israel Shows a Surprise Rise, but Home Prices Dip

Economists: Although deflation era is over, the central bank won’t raise interest rates.

Ilan Asayag

Inflation climbed far faster than economists expected in July, but there was some muted relief for Israeli consumers in a rare decline in the price of homes, figures the Central Bureau of Statistics released Monday showed.

The consumer price index rose 0.4% in July, twice the pace economists had forecast. It was the fourth straight month of higher consumer prices after a long period of deflation, although prices for the last 12 months were down 0.6%, the CBS said.

But even as other prices were climbing, the housing index – which measures the price of homes bought – showed an 0.3% decline for the May-June period, marking the first decline since August-September 2015. They also dropped for three months in 2014 when an abortive plan by then Finance Minster Yair Lapid briefly put a brake on soaring prices.

Lapid’s successor, Moshe Kahlon, has made reining in home prices his No. 1 priority, imposing taxes on residential investors in the hopes they will leave the market for ordinary buyers and pushing hard the Mechir L’Mishtaken program that tenders land to contractors at a discount on condition they pass the savings on to home buyers.

But there have been brief respites from the steady rise in prices since 2007 and a single two-month period isn’t enough to signal a trend.

In any case, the annualized pace of housing price rises slowed in May-June to 6.9% from 8% the same time last year.

According to the CBS’ housing survey, the average price for a home in the second quarter was 1.43 million shekels ($370,000 at current exchange rates), down 1.3% from the first quarter, although up 2.4% from second-quarter 2015.

The survey covers home sales in Israel’s largest cities and, unlike other surveys, encompasses properties of all sizes. Unlike the housing index, the survey doesn’t adjust prices for home size and so it doesn’t fully capture trends in the market.

The survey found prices still rising sharply in the Haifa area in the second quarter, where they were up 6.6% from the previous quarter and 16.3% year on year to 1.02 million shekels. Tel Aviv saw a smaller gain of 1.9% quarter on quarter and 10.4% year on year to an average of 2.73 million.

In Jerusalem, by comparison, prices edged down 0.2% quarter on quarter and were down 3.1% year on year to an average of 1.84 million.

Despite the relatively high July consumer price index, economists said they had no reason to believe the Bank of Israel would lift interest rates anytime soon from their historic low of 0.1%.

Ilan Artzi, chief of investments at Hilman-Aldubi, said the CPI was relatively high but that the inflation environment in Israel remains low. Trending figures from the CBS put inflation at an annualized 0.3%, well below the government’s target of 1-3%.

Artzi said Bank of Israel Governor Karnit Flug was in a trap.

“On the one hand, the bank can’t raise interest rates because of the massive monetary expansion program in Europe and Britain and the continuous delays in the United States in raising interest rates. On the other hand, the central bank can’t lower rates because of the state of the economy and housing prices,” he said.

“So, I believe interest rates will remain where they are for a long time.”

Higher interest rates would attract foreign purchases of shekels, strengthening the Israeli currency and making exports less price competitive. Lowering rates would encourage more people to take out mortgages, boosting demand for housing and raising prices.

Jonathan Katz,, economist at Leader Capital Markets, blamed the unusually high July CPI on rising home rentals, which rose 1.9% in July. He said Kahlon’s plan to impose taxes on owners of three or more homes – part of his plan to deter property investors – would likely cause rent increases to accelerate.

Katz said he expected that the Bank of Israel would leave its base rate unchanged at least until the end of 2017.