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From the ground up: ‘When is the property bubble going to burst?’
ByRAPHI BLOCH
June 25, 2014 09:41
The assumption here is that Israeli real estate is in a bubble similar to the one in the United States, which when it burst, created the property crisis.
Homes for sale in San Marcos, California.

Houses for sale in California, real estate 370. (photo credit:REUTERS)

One question I get asked almost daily by both buyers and sellers is: “When is the property bubble going to burst?”

The assumption here, made by almost everyone, is that Israeli real estate is in a bubble similar to the one in the United States, which when it burst, created the property crisis.



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To answer our question, we need to first define our “bubble.” According to Wikipedia: “A real-estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real-estate markets. It can be identified through rapid increases in valuations of real property, such as housing, until they reach unsustainable levels and then decline.”

If we break down our definition, we can see that one of the “requirements” for a bubble is that it occurs periodically. If we put aside for the moment small price fluctuations caused by political or security events such as the Second Lebanon War, we can see that residential real estate in Israel has been steadily increasing in price for almost two decades with very few real downturns. Historically, housing- bubble bursts last between four to five years, which has not been the case with the occasional price corrections we see from time to time in our market.

Another identifying factor of a housing bubble is the rapid increase in valuation of properties to unsustainable levels, followed by a decline. While some areas of the country, such as Beersheba, have seen these rapid increases, on average, property prices across the board have followed a more consistent upward trend, rising as a result of consumer demand as opposed to speculator investment. Furthermore, there has been no real decline in prices to speak of, so this also makes the existence of a bubble more dubious.

This is not to say that there haven’t been periodic slowdowns in the property market, where sellers wait for buyers to catch up with the increasing asking prices of apartments. But with many sellers under no pressure to sell, they are happy to wait out these periods and don’t reduce the prices on their properties. If such price cuts were to happen on a large enough scale, it would constitute a bursting of the bubble.

If a housing bubble did exist in Israel, according to the rules of economics, at some point the bubble would burst and the market would correct itself naturally. Almost every politician, national and local, has addressed the housing problem, with a myriad of suggestions for how to solve it. That is a strong indicator that few believe a natural economic correction is likely to occur, and so they are desperately looking for a legislated or taxation-based solution to the increasing problem of affordable housing.

In my opinion, a housing bubble does not exist, and therefore logically it can’t “burst.” What does exist is a market where demand exceeds supply, and we have many buyers with limited means competing for a small pool of affordable homes. This would have the potential to become a “bubble” were it not for the fact that most sellers are not in a situation where they need to reduce prices. They are merely happy to sell at increasingly higher prices, or alternatively, not to sell at all.

raphibloch@gmail.com

Raphi Bloch is the manager of the Re/Max Vision real-estate agency in Jerusalem.
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Tags:
  • Israel
  • finance
  • economy
  • house prices in israel
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