Five Reasons to Buy a Flat Now

Sometimes it's better to rent an apartment, sometimes it's better to buy one. TheMarker has already presented the case for renting: if one ignores the emotional reasons, then buying a flat is often not necessarily the best use one could make of one's money.

One reason it's usually not a brilliant investment, is that the rent one can get for one's flat is too low to justify the investment, compared with alternatives.

Just check rental income from interest rates one can get on government bonds. Returns on rental income is almost always lower than returns on risk-free bonds, especially (at this point in time) American bonds.

So, from the purely economic perspective, it's better to rent, not buy, or to sell a flat, not rent it out. Naturally, the same is true when we take a mortgage to buy a flat. Interest on the mortgage will be higher than the rent you can get for the flat. That is why, by the way, Israeli real estate investment firms generally engage in types of commercial real estate, not housing.

Fine, all that, but not practical, and the fact is that most Israeli families own housing at some point in their 30s-40s. And there are good reasons to own a flat: that feeling of stability, of independence, of being a homeowner. Also, often the parents or grandparents kick in a nice sum of money, which they wouldn't if the young couple announced it was buying a water buffalo. And sometimes it just pays, irrespective of the emotions and the parents.

Here are five factors that support the theory that may render buying a flat a wise move at this time.

1. Rent has climbed.

In Israel, interest on your mortgage runs higher than rental income. But that's assuming that the price of housing rises more or less in tandem with prices of other assets.

But the gap between interest and rental returns has been shrinking. In other words, because local interest rates dived, owning a flat has suddenly become a better deal than it was.

It helps that in many places, rent has soared while apartment prices haven't, which translates into higher returns.

2. Housing prices are that high. 

Israel's real estate went through a protracted recession, which depressed housing prices in many areas. Companies collapsed and building starts all but disappeared. The sector began to rally two year sago and the figures look much better. The price of commercial property has risen sharply and real estate companies are raising money on the stock market like never before.

Yet housing prices haven't risen yet, and in many places remain low enough to attract potential buyers.

Several factors support the rally, which will ultimately raise apartment prices. These include Israel's economic growth, the nadir in building starts (which steadily reduces supply), dropping unemployment, rising real wages, and the possibility that settlements outside the Green Line will be evacuated one day, spurring more demand for apartments.

3. Interest on mortgages is low.

If monetary interest rates are low, so is interest on loans to homebuyers, and prevailing interest rates are key to housing prices. The difference between a mortgage at 4.5% and 5.5% is vast. That 1% over a 20-year loan can translate into NIS 100,000. (It generally pays more to shave interest on mortgage by 1% than to argue over the price of the house.) Average interest on mortgages is now about 4.5%: with housing prices low, this is a great time to borrow.

4. Your situation is probably better.

As the economy picks up, more and more people feel comfortable about their employment horizon. A mortgage is usually considered reasonable if it takes up to a third of the family's monthly income. When income grows and becomes more secure, it's easier to commit to a mortgage. But don't forget that if you borrow too much, you could founder down the line.

5. And your alternative is-?

The low prevailing interest rates around the world have left precious few relatively safe investment options. Stock markets are sky-high and returns on bonds and deposits are lower than they have been for years. You could earn a few percent or lose money: suddenly buying an apartment looks like a pretty good place to put spare money seeking returns.