Central Bank: No Real Estate Bubble, Despite Low Interest Rates

The Bank of Israel is worried about the soaring real estate market, but it doesn't think there's a bubble, officials have said. And despite the stock market and the real estate market, it won't be raising interest rates, due to other economic factors.

Despite the increase in local housing prices, the Bank of Israel doesn't see any real estate bubble: Current housing prices are on average only 15% higher than prices in the 1990s, the bank says.

In order to calculate whether current real estate prices are justified, the bank calculated the present value of housing costs - rental prices and interest rates - and this showed that the present value of apartments are in keeping with the market prices. In addition, given that the current increases come after nearly a decade of falling prices, the current level of the real estate market is not high in historical terms.

Reasons for the high prices include the lack of land, bureaucratic hurdles posed by planning committees and low interest rates.

While the increases on the stock market and in the real estate market concern the bank, officials say they aren't repeating the mistake of U.S. Fed chairman Alan Greenspan - creating a real estate bubble by leaving interest rates low for too long.

If it were just a matter of the stock market and the real estate market, bank governor Stanley Fischer would have raised interest rates, the officials said. However, since the interest rate affects the economy as a whole, they say that they cannot change it sharply, since Israel isn't yet out of risk of a recession.

The bank is also concerned by the frozen export market, as the financial crisis continues around the world. For that reason, it will continue influencing the shekel exchange rate by buying dollars in order to prevent appreciation - even though top bank officials believe the bank has enough foreign currency reserves, if not more than enough.

Despite wanting to stop its dollar purchases, the bank will continue doing so until the economy stabilizes, the officials said.