Ton of Bricks / What the Banks' Analysts Aren't Telling You

Analysts conclude that a supply glut looms and that housing prices will probably fall.

In recent weeks equity research analysts at banks and investment firms have been flooding the land with speculation that housing prices are about to reverse and start dropping.

Analyses from banks and investment houses come clothed in respectability. They radiate an aura of reliability and scientific accuracy. The average reader doesn't ask too many questions, such as how the distinguished analysts reached their conclusions and to what in-depth information they were privy that Yoni Q. Public was not.

Well, it turns out that these learned papers are usually based on no more than figures from the Central Bureau of Statistics, especially figures showing an increase in Israel's housing supply - at a time when the number of deals has diminished. The analysts conclude that a supply glut looms and that housing prices will probably fall.

That much is unarguable. Nor is there any doubt that the previous interest rate hikes, measures by the Bank of Israel to make mortgages more expensive and harder to come by and tax law changes to make residential investment properties less attractive have depressed demand. And lower demand translates into downward pressure on prices. It is therefore hard to argue with somebody who claims that based on this Israeli home prices are due to decline.

The problem isn't with the accuracy of the data, it's in the relevance of the conclusions and the tendency to ignore inconvenient facts.

Regarding relevance, the Finance Ministry's State Revenue Division has been saying that home prices have been trending down from the start of the year. The distinguished analysts seem to be predicting the past.

The skepticism over these "forecasts" applies mainly to the banks' equity research departments. Banks have real estate departments. They lend money to developers. They employ assessors to keep them current on the progress of construction projects. For months these assessors have been reporting a dramatic drop in sales and a creeping decline in prices.

The banks' research departments had at their fingertips the tools to notice when the downturn began. One can only guess why the analysts didn't use these tools and made do with figures from the Central Bureau of Statistics. Perhaps they jealously guard the precious information from their assessors, saving it for in-house analyses, while sharing with the public "forecasts" about trends that are already in play.

There are other variables that complicate making predictions about the housing market. One is interest rates. There is little doubt that the decline in interest rates since the onset of the great global crisis in 2008 was the main reason home prices in Israel climbed so high. Once the Bank of Israel began to raise its rates again that measure, together with others taken by the central bank and the Finance Ministry reined in the upward spiral.

But the Bank of Israel did a U-turn and cut interest rates. Pundits suspect it will do it again - and that supports another upswing in housing prices.

Another trend of late is the drastic decline in building starts. Developers are worried about credit constraints and future sales. Fewer building starts mean the increase in the housing supply is about to level off - yet another shot in the arm for prices.

These relatively new trends of declining interest rates and housing supply argue against the claims of the banks and their analysts.