Forbes Analyst: Israel's Economic Boom Destined to Pop

Jesse Colombo warns of housing, high-tech and offshore gas bubbles, saying they will drag Israel's economy down when they inevitably go bust.

Bloomberg

Israel's economic boom is actually a bubble destined to pop, economic analyst Jesse Colombo wrote in Forbes on Tuesday, singling out the housing, technology and offshore gas markets.

"Sadly, Israel’s economic boom is not the miracle that it appears to be, but is actually another bubble that is similar to those that caused the financial crisis," wrote Colombo, who was recognized by the London Times for predicting the global financial crisis and is currently warning about many other economic bubbles.

Israel's bubble is most likely to pop when global and local interest rates rise as the global economy appears to recover, Colombo writes. At that point, he says, housing prices will fall, there will be a wave of startup failures, banks will experience losses on their mortgage portfolios, and technology and banking stock prices will fall particularly hard, dragging down the overall stock market. In addition, he predicts, unemployment will rise and economic growth will "go into reverse."

"Though it can be argued that Israel is no longer an emerging economy, Israel's economic bubble has been following a similar pattern to the overall emerging markets bubble that I have been warning about," says Colombo, who has warned about growing bubbles in countries including China, Canada and Australia and markets including Web 2.0 startups and U.S. higher education.

Colombo, a self-styled "anti-economic bubble activist," warns that "inflation may rear its ugly head again now that interest rates have been reduced to record lows for the second time since the global financial crisis."

Since 2006, Israel has experienced the largest property price increase among OECD nations, writes Colombo, adding that property price increases have far outpaced the country’s average nominal income gains of 23 percent since 2007 and 12.5 percent since 2009.

Since 2008, he writes, the average rent rose from 30 percent of the average salary in 2007 to 38 percent in 2013, with rent "consuming an alarming 56 percent" of the average salary in Tel Aviv.

"Like many nations outside of the hard-hit U.S. and Europe, Israel’s inflating housing bubble helped to boost the country’s consumer spending in the wake of the global financial crisis," he writes. "Unfortunately, this wealth effect is not sustainable and will actually reverse when Israel’s housing bubble pops."

International high-tech companies are making the same mistakes in Israel as they are in Silicon Valley, writes Colombo: overpaying for "speculative startups with little to no earnings," which he says is a throwback to the late-1990s dot-com bubble.

The interconnected Israeli and American tech bubbles are likely to pop at the same time, warns Colombo, adding that the results could be dire.

"The popping of the Israeli tech bubble is likely to coincide with the popping of the tech and stock market bubbles in the United States," he writes. "Israel has experienced a tech wreck once before when the collapse of the late-1990s Dot-com bubble (combined with the 2001 Israeli/Palestinian Conflict) helped to push the country’s tech-heavy economy into the worst recession since 1953."