The Danger of Overkill

Deutsche's Dan Harverd says there is plenty of housing available, and freeing up more could lead to a crisis.

Bank of Israel head Stanley Fischer isn't the only one worried that a glut of construction could gut housing prices and beyond. It's happened elsewhere in the world.

Seven months ago, the head banks analyst at Deutsche Bank Israel, Dan Harverd, wrote a column for TheMarker in which he warned against overkill. If the state suddenly frees up too much land for development, he warned, the result could be a too much construction, and a collapse in home prices, leading to a real estate industry crisis and wider economic trouble.

Deutsche Bank financial analyst Dan Harverd.
Dan Peretz

Last week, after months of calling on the government to free more land for housing construction to stop the upward spiral in home prices - Fischer warned of that very scenario.

Harverd says he guesses there was a psychological change that led to the about-face.

"One of the reasons for the big increases in price as the sense that if I don't buy a home now, its price will rise in the future," he said. "Today, subsequent to the cost-of-living protest, that psychological element has changed dramatically. People are saying that prices are very high and there's a chance they'll drop."

The second element that has changed is the cost of money, Harverd explains.

"Low interest rates were one of the main reasons prices rose so much. But the Bank of Israel has increased the cost of money," he said.

It did that by changing the rules governing interest on mortgages, limiting the proportion of housing loans that could bear floating-rate interest. And there's a third change in the market, Harverd says: The supply of housing has grown a great deal.

Harverd says statistics show that the public is misguided in thinking there is still a housing shortage.

"I know I'm about to say something that flies in the face of the public discourse, but I'm not at all sure there's any shortage of housing in Israel," he said. "If we look at the statistics, in the last decade 33,000 housing units were erected each year, on average, and the inventory of unsold dwellings did contract from 25,000 to 15,000, meaning the inventory dropped by 1,000 housing units a year. But during the last two years, the number of building starts increased by about 30% compared with the average of previous years to 40,000 or 45,000 a year, and the inventory of unsold dwellings jumped directly to 19,000. If the intention is to increase the supply even more, a surplus may form, which will cause a sudden, sharp decrease in prices."