“Real estate accounts for 19% of gross domestic product directly and another 13% indirectly. Real estate accounts for not less than 40% of the public’s total wealth. It is unlikely that you can control the real estate market just because it suits a certain political agenda — for example, by reducing overall housing costs.”
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So says Elli Kraizberg, a professor of finance and real estate at Bar-Ilan University who, together with Moody’s, founded the Israeli credit rating company Midroog.
“Not only is government intervention at this stage too late, but if it has a role, it must take into account the possibility that the next stage will be a significant price decline whose implications could be much more significant,” says Kraizberg, who recently finished a book (in Hebrew) on the market and the common myths and misconceptions about it. He lists dozens of factors that affect property prices.
“There’s a tendency to say that there’s a real estate price bubble in Israel, and that prices are too high. I’m not convinced there’s a basis for this,” he told TheMarker. Price increases in Israel are not out of line with other Organization for Economic Cooperation and Development countries.
“If the graph of housing prices published recently by the OECD had as its starting point 1997, rather than in 2004, we would see that the Israeli market was not exceptional. Israel prices rises are perceived as an anomaly because the cycles are timed differently. Israel actually was among the last in the rate of price increases. Immigration from the former-Soviet Union in the 1990s changed and even extended the price cycle in Israel compared to other countries.”
The method used for measuring property in Israel, by the square meter, also contributes to the impression of a housing bubble. When per capital income and per capita space is taken into account, the most recent OECD index “shows a surprising balance among most of the developed countries,” says Kraizberg.
Don’t blame the planners
“Hong Kong is considered the world’s most expensive real estate market, but if you consider that an average apartment in Hong Kong is much smaller than in Tel Aviv, that is, the amount of space per person in Hong Kong is much smaller, the price gap closes.”
With respect to the claim that planning authorities obstruct residential building, Kraizberg says: “Israel has the most sophisticated real estate market, much more sophisticated than anywhere else. It’s true that excessive regulation is a negative factor, but anyone complaining about Israeli planning bureaucracy should try to get a project going in New York.”
Nor does he think the Israel Lands Authority, which holds most of the country’s land, is responsible for delays in construction. “In Herzliya Pituah half of the land is privately owned and half by the ILA. Is there a fundamental difference between the value of land there? Regulation doesn’t explain the rise in prices. At best, it could explain high prices.”
Conventional wisdom holds that there is a huge shortage of homes in Israel.
“That’s largely a myth, for several reasons. First, it’s simplistic to look at shortages only as a shortage of homes and land. There are other factors, such as air rights and population density.
“Theoretically, you could put the entire global population on 55% of the territory of Israel, ignoring the environmental consequences of course, so you can’t talk about a land shortage. Unlike other goods, the supply of built up areas is conditional on demand. We’re supposedly in a period of high housing prices and high profitability for construction, so we would expect to see a high rate of building starts. That hasn’t happened— not because land is scarce, but because it’s expensive. The value of land is contingent on demand. In other words, at any given price level if demand exists supply will adapt.”
People aren’t building because of regulatory barriers.
“Regulation leads to a delay in the response of the market, but it’s not a barrier. Occasionally stories are published about developers who aren’t building on land available to them. That’s because the market has a mechanism that regulates housing starts. The developers know what’s good for them. The critical variable in real estate everywhere isn’t available land but low interest rates. Anyone who can predict the interest rates can accurately predict the changes in real estate prices. “
The government is trying to increase the supply of apartments through Finance Minister Moshe Kahlon’s “target price” program. Where will it lead, in your opinion?
“I’m probably one of the last believers in the market mechanism — not because it’s just, but because it’s the only one that doesn’t have to worry about the next Knesset election. The government can’t control the market with a magic wand...so its various plans won’t lower prices. On the contrary, they were introduced too late because we are at a very mature phase of the price cycle, and it could cause future damage and create a volatile, nervous market.
“It now seems that the social agenda is to provide less expensive housing for young couples or first-time home buyers. But if we enter a period of declining prices... it will hurt older people, who are dependent on the rental market to survive. At times like these, not only do rents fall but many apartments remain empty. “
Brace for a drop in prices
When you say the price cycle is in a mature stage, are you saying that prices will fall soon?
Kraizberg explains that previous business cycles in the property market were 14 years or 16 years long. “Israel’s current cycle began in 1996, so it’s in a mature phase, entering its 20th year. That means the likelihood of declining prices is much higher than the probability of further rises.”
Do you have an alternative housing policy proposal?
“We’d like to have control, but there doesn’t seem to be much to do, and I don’t see how economic policy makers can smooth the cyclical behavior. One thing is clear: Using ad hoc policy as a magic wand is politics, not economics.
“An example ...is Housing Minister Yoav Galant’s claim that public housing can be built at no cost to the government by raising money from institutional investors. Is that a solution? Absolutely not. Raising money from institutional investors will pass on the burden to future generations, who will have to pay the interest on the money.”
Kraizberg’s new book deals with a variety of issues connected to the property market that affect home prices, from historical trends and demographic processes to development and construction costs, the effects of the capital market, infrastructure, environmental and cultural factors and the issue of affordable housing — all of it relying on research done abroad. He says Israel has a great shortage of data on the real estate market.
“The collection of statistical data only began in 1993. Transaction records based on the Betterment Tax database are problematic and filled with errors, so there is almost no in-depth study in Israel, in contrast to the abundance of data and indicators in other markets such as the United States.”
The 90 factors
The highlight of the book lies at the end, where there is a table of some 90 factors that affect the relative price of housing in different areas. The factors are also sorted according to duration. Short-term factors include taxation, the differences between the asking price and the final price, sharp changes in interest rates, government intervention, market entry of a large number of small developers and the number of construction permits issued.
Medium- and long-term factors, according to Kraizberg, include population density, topographic limitations, fertility rates, mobility rates, household income growth and unemployment rates. Most of the associations have been proven empirically, in studies, while others have a theoretical rationale.
What’s the table’s purpose? It seems very complex.
“Experienced, business-savvy entrepreneurs apply the rules in the book intuitively, automatically. They’re actually meant for people without real estate experience.”
The book also points out some common myths about Israel’s property market, such as “the past is a good predictor of the future” or “real estate prices in Israel only rise.” Both are incorrect. Property prices, in Israel as in other developed countries, are cyclical, and the longer the cycle, the more profound the price decline during a recession.
Another common myth is that renting is like throwing money away. This too is unfounded, Kraizberg says. “In the housing market — especially in Israel, where the lack of regulation over rents earned the praise of OECD economists — there is an economic balance between buying and renting,” says Kraizberg. He says it’s an illusion to think that renting offers affordable housing for people who cannot buy, and that in principle there is no significant difference between buying and renting, since both markets operate similarly.
Then there’s the myth, which draws many Israelis into foreign real estate adventures, holding that “if apartment prices in Petah Tikva are triple those in Berlin, it makes sense to buy property in Berlin.” Kraizberg notes that the argument ignores relative risk, demographic factors, per-capita income “and the banal fact that foreign investment ‘by remote control’ is risky.”
There’s also a myth that says “government intervention in the real estate market is always in the desired direction.” He points out that changes in tax laws, for example, can cause prices to rise, not fall.
According to Kraizberg, there are a few long-term market trends that bear attention: “Urbanization, which is increasing in developing countries but slacking off in developed countries, will soon create a situation where half of the world population will live in cities; significant demographic trends, such as the population decline in Europe; and reverse suburbanization, which began 20 years ago, in which cities in the developed world lose populations not to suburbs but to areas that are adjacent to cities,” he says.