A November 7, 2010 article in Globes, Israel’s financial newspaper, investigated the phenomenal rise in housing prices in Israel. Over the past twelve months, the average price for a four room (3-bedroom, kitchen not counted) apartment has increased by 15% (in Jerusalem, by 18%), while inflation rose by only 1% over the same time period.
A little background to give perspective: The Israeli housing market grew sluggishly from 1999 to 2007; while inflation increased by 24%, housing prices rose by just 19%. In marked contrast, housing prices over the past two years have risen by over 30%, corresponding inversely to the general decline in real estate throughout the rest of the world.
The burning question is: Why?
There are many explanations, most of which are interconnected and at their core relate to the basic issue of supply and demand. In the first place, Israeli lenders have never played the subprime game and therefore the real estate bust that occurred overseas never materialized in Israel as both developers and end users were required to put down significant funds before banks would provide financing. Secondly, the Israeli unemployment rate capped at 8% during the depths of the global financial crisis, and has already returned to 6.3%, reflecting a robust and dynamic economy. Thirdly, the supply of new homes for sale has been falling steadily over the past four years, from a level of around 14,000 homes at the beginning of 2006 to just over 9,000 at the end of July 2010. This isa small inventory for a country whose population is over seven million.
The interesting fourth reason is that mortgage rates have remained relatively low and the Bank of Israel is unwilling to raise interest rates, as doing so would strengthen the shekel and hurt Israel’s exporters whose businesses require a strong US dollar. Able to obtain mortgages with low interest rates, buyers feel comfortable purchasing higher priced homes.
As you may have surmised through personal and anecdotal information, the tremendous surge in Jerusalem’s real estate market is unique due to the city’s special meaning for religious Jews around the world. In future columns, we will explore the many facets of the Jerusalem market.
So where do prices go from here? Must they continue escalating? In my next column, we will explore how the Bank of Israel is combating the rising prices for homes, and how its policies affect overseas buyers.