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Israeli housing market is reminiscent of the US on the eve of 2008

The importance of the report lies in a graph that should be of great concern to the Bank of Israel: a comparison of the development of the purchasing-rental ratio.


A report published by the International Monetary Fund (IMF) on the ratio of housing prices to rental rates shows that the gap in the Israeli market grew at the fastest pace in the past decade (March 2017).

“Housing prices remain very high, which has become a vulnerability and a focus of vulnerability when they disproportionately hurt low-income households,” according to the IMF’s Global Housing Report for the second quarter of 2017, Last week.

According to the report, “supply-side bottlenecks still require treatment to improve access to housing and still contain macro-financial risks.”

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The IMF’s economists also argue that “the necessary reforms must improve municipal incentives for development, ensure adequate privatization of land and urban renewal, shorten the times for building permits and reduce construction costs.” They argue that “macro-stability policy is tight enough and that the Bank of Israel must carefully monitor developments.”

The importance of the report lies not necessarily in words written about Israel but in one graph that should be of great concern to the Bank of Israel: an international comparison of the development of the purchasing-rental ratio. This ratio calculated as the price of the apartment divided by the annual rental cost – the monthly rent multiplied by 12.

A red flag for a real estate bubble

According to the fund, this is the most important measure to calculate the feasibility of owning an apartment, but more importantly, at the macro level, the ratio of buy-rent prices can also be used to understand broader macro-economic trends. For example, in the US, the ratio has increased dramatically in the wake of the housing market crash of 2008. In retrospect, economists say, it was a red flag of the housing bubble.

Israel located at the end of 2016, third in the organization after New Zealand and Sweden, as the ratio between the price of apartments and rental rates in Israel is also high by international comparison. It is the case when in 2006, a decade later, the ratio in Israel was the lowest in the organization. It means that the price-to-rental ratio, which is considered suitable for bubble formation, was the highest in Western countries and reached 69% within a decade.

This index is significant for all apartment renters in Israel: if the index converted, that is, the calculation of the cost of annual rent divided by the price of the apartment, receive the return on equity of the apartment. According to professional economic literature, purchasers of investment apartments expect the property to yield an acceptable minimum return.

As the price of the property increases, the property owner will expect higher compensation, which will be reflected amounting to the rent. Therefore, a high purchasing-rental ratio over time foreshadows a trend of rising rental prices.

Stabilization of housing prices

“The global housing prices continue to indicate increases mainly supported by the negative real interest rates prevailing today in the world, especially those set by the central banks in the leading Western countries, and the world flooded with Montreal liquidity, and from the standpoint of investors, real estate investment has become attractive. There is now a consensus among economists in the world that low-interest rates will remain so for a long period, so it is now difficult to paint a scenario in which sharp and surprising interest rate increases will lead to sharp declines in housing prices worldwide. “Prof. Leo Leiderman, the chief economic adviser of Bank Hapoalim, in a conversation with Calcalist.

“In Israel, the latest data indicate a certain stabilization in housing prices: the relevant index indicates a rise of only half a percent in the last six months, and if this development does not change in the coming months, Israel may be listed as one of the first countries where housing prices began to stabilize,” he said.

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