Israel Poised for Big Decline in Home Prices, Study Warns

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A real-estate project in Tel Aviv Credit: Ofer Vaknin

Flying in the face of most observers, a report by a socioeconomic think tank released Monday said Israeli housing prices were set for a big fall, because homes are being built at a faster rate than the growth in demand.

Dr. Noam Gruber, a researcher at the Shoresh Institution for Socioeconomic Research, said that, since 2013, the number of new homes whose construction has been completed has exceeded the number of new families being created.

Housing prices have continued rising – they were up 6.8% in the 12 months through August – but Gruber said it was because property investors have been keeping demand brisk, not buyers who are looking for a roof over their heads.

Gruber warned that the phenomenon cannot continue for much longer and that when the trend in housing prices turns, it could have severe ramifications for the Israeli economy.

“Even if falling prices make it easier for families interested in buying a home, it will seriously harm the construction industry and households that have invested their savings in buying homes for investment,” he said.

“Property developers have bought land and taken on long-term debt based on home prices remaining high for the long term. Declining prices are likely to push many of them into bankruptcy and to fire employees. In this scenario, property investors will see a big part of their paper profits disappear and their rental income is likely to fall,” Gruber warned.

The Bank of Israel has expressed concern in separate reports that Israeli banks are also at risk from a housing market downturn, due to their extensive mortgage portfolios and lending to the construction industry.

The Shoresh Institution report flies in the face of Finance Minister Moshe Kahlon’s policy, which has tried to step up building starts to above the 50,000-a-year level they reached in 2015, while simultaneously trying to deter property investors. Policy makers have assumed that the supply-demand balance still works against home buyers.

Gruber said the number of new families in Israel began to fall below the rate of new-home completions in 2013. That year, the number of housing completions reached 42,500 units, while the number of new families – a rough indicator of demand growth – was just 39,500.

“Because the number of housing starts in 2013-15 has remained relatively high, it appears that over the next two years the number of new housing units can be expected to remain high and significantly exceed the demographic increase in demand,” he said. “Are there enough families to live in all the homes that will be completed in 2016-17?” he asked.

Although recent government data show that investors have been pulling out of the market as Kahlon prepares to impose a tax on people holding three or more homes, starting next year, Gruber said there is evidence of the impact of investors on the market – and that their role in inflating demand has been understated.

Many are operating under the radar by, among other things, buying a single home for investment and renting it out while themselves opting to live in a home they rent from someone else, Gruber said. This kind of investor doesn’t get counted in official figures, which only consider someone a “property investor” if they own two or more homes.

Gruber doesn’t predict when prices will turn lower or by how much, but warned of a dangerous scenario where they could collapse. In it, he sees demand for people buying homes to live in falling, reducing the demand to rent homes from investors. With rents falling, investors would stop buying homes, too, exacerbating the decline in overall demand.

“A reversal of the trend [in home prices] may cause investors to flee the market on a large scale and prices to collapse – which would create a housing market crisis,” he cautioned.

In a conversation with TheMarker, Gruber said he saw current conditions as being similar to the situation in Israel in 2000, when home prices began a seven-year decline of 30%. “At the start of the 2000s, we were building a lot more houses than were needed. It was a period of excessive supply, and it seems we’re entering a period like that again,” he said.

The difference, he added, is that investors now play such a big role in the market.

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