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The sky's the limit

Are we in the midst of a real-estate bubble?

Constructing in Jerusalem
Photo by: Ariel Jerozolimski
‘The writing is on the wall,” states the adage, but when it comes to the real-estate market, it may be on more places than that.

“How to play the bubbles like a pro,” reads the headline of an article in The Wall Street Journal, which proceeds to name Israel as one of the few countries that could contribute to a new global real-estate bubble.

“The situation in the real-estate market: House owners have gone crazy,” another headline, this time on Ynet, states more bluntly. The article quotes a survey conducted during the last two weeks of March by the Levi Yitzhak property magazine, which shows that throughout the country property was put on the market at significantly higher prices than equivalent property on sale the month before – despite the fact that, far from going up in value, many of the assets had actually depreciated.

Then there is the Knight Frank Global House Price Index, a widely quoted indicator of the state of the international real-estate market, which published its review of 2009 on April 21. Of the 47 countries listed, Israel ranked remarkably high with one of the greatest increases in housing prices over the past year. With a 21.3 percent increase, it was surpassed only by Hong Kong (27.6%) and China (25.1%).

And finally, there are there are the apartment listings themselves. A quick glance through the classified section of Ma’ariv should be enough to provide a peek into the situation facing potential home owners: “Ness Ziona, five-room flat, with porch – NIS 1,700,000,” “Netanya – five-room apartment with an elevator in the building and central heating – NIS 1,400,000” and, in the notoriously expensive Tel Aviv, “One-room apartment on Rehov Hayarkon, with a view of the sea – NIS 880,000.”

The numbers certainly appear pretty staggering. And with the average salary at NIS 8,397 per month not keeping pace with rising property costs, would-be investors are inevitably asking with more frequency if the country is in the midst of a real-estate bubble. And if so, when will it burst?

To speculate on where prices might be heading, it’s worth understanding where they came from. Yet even among influential figures in the housing market, the root causes of the current situation are a source of debate.

“[The] shortage of land is the biggest factor [in keeping prices high],” says Yossi Gordon, CEO of the Association of Contractors and Builders in Israel. “In Israel, 63% of land is owned by the government... As long as the government doesn’t increase [the amount of land available for development], there is no reason that the prices will go down.”

In addition, Gordon says controversial government policy in seemingly unrelated areas is adversely affecting the real-estate industry. “We have a shortage of workers,” he says. “And while the government is trying to reduce the number of foreign workers, the ones who pay the price are those who buy property.”

For Shelly Levine, owner of Tivuch Shelly Ltd., a company which played an integral role in populating Ma’aleh Adumim, Beit Shemesh and Modi’in, the problem isn’t so much a domestic one, but rather a result of foreign and diplomatic policy.

“We lost 425 units in Har Homa and Ma’aleh Adumim to the construction freeze,” she says, referring to Prime Minister Binyamin Netanyahu’s decision to accede to US requests for a moratorium on construction in the West Bank and parts of east Jerusalem. “It’s a very bad time for me – for Tivuch Shelly – we just don’t know what’s going on in the market. We just don’t know what will happen.”

Traditionally, she explains, her younger clients opt for cheaper locations, which – given that most of her business is focused in and around Jerusalem – translates to cities and neighborhoods that straddle the Green Line.

“Young couples go to places like Pisgat Ze’ev – well now there’s a [freeze] in Pisgat Ze’ev. So let’s take that out of the equation,” she says. “They also go to Har Homa, Givat Ze’ev, but there are no new tenders there. We had an apartment in Mitzpe Yeriho – it stopped; Hashmonaim – it stopped. All of these places where young couples can go to buy a little bit cheaper than the major cities, it’s stopped now.”

And as a result, Levine concludes that “prices are really going up... because there’s nowhere for people to go.”

WHILE THE Construction and Housing Ministry agrees with Levine about the building freeze, that it certainly is a factor which both reduces available units on the market and drives potential buyers inside the green line, it takes particular exception to the claims made by the Association of Contractors and Builders in Israel. According to the ministry, what drives up the prices isn’t how much land the government releases, but rather the excessive amount of money that contractors pay for the land in the first place.

“The Israel Lands Administration continues to release large amounts of land, and it isn’t interested in getting good prices for this land,” Construction and Housing Minister Ariel Attias said in a statement. “With most tenders offered by the ILA and the Housing Ministry, the value of the [tender] isn’t even published, and isn’t even known.

“Yet, in high demand areas, the prices being offered for these tenders are much higher than the value of the land – in some cases two to four times the value,” Attias continued. “We hope that investors will internalize the fact that more and more land will be released, and therefore they will stop offering such high prices for the tenders.”

The ministry emphasized that it “continues to put on the market large amounts of land so that contractors can offer low prices for the tenders... Since September 2009, large amounts of land were released on four separate occasions in order to combat rising costs – translating to about 18,600 apartment units in half a year. At the end of the day, investors and buyers will understand not to commit to exorbitant prices.”

Debbie Goldfischer, real-estate consultant and founder/editor of buyitinisrael.com, points to a different contributing factor. Noting that interest rates recently reached their lowest point in the country’s history – 0.5% from April to July 2009 – she argued that “this is a fact we definitely have to take into account.

With low interest rates more people take out loans, and therefore prices remain high. But, she continues, “if interest rates rise, people aren’t borrowing as much money, and they can’t pay as much, which also has to have an impact on housing prices.”

However, those in charge of the interest rates bring the debate full circle.

“I must say that according to our measurements, the contribution of interest rates is not huge,” says Dr. Yossi Achim, Bank of Israel researcher and coauthor of its most recent annual report, published on April 21. “Of course, interest rates are part of the fundamentals that affect the price, but this is not to say that if you just raise the rates, prices will fall. It will moderate demand – no doubt about it. But there are still long-term issues on the supply side that need to be dealt with.”

WHILE THERE may not be a consensus on what caused the spike in prices, there is no disagreement that they are considerably higher than they were two years ago. But does such fluctuation automatically imply a real-estate bubble? A bubble is characterized by a rapid increase in the value of property until it reaches an unsustainable level relative to a number of economic elements, including the income of residents in the affected areas. And while recent numbers seem to fit the mold, some argue that’s only because the data is not being put in the proper context.

“If we look at only the last two years, prices went up at a very fast rate,” says Achim. “They went up by around 24%, and I’m talking in real terms (that is, adjusted for inflation). That’s something like 11.4% a year.” But over the long term the picture changes drastically, he says, noting that between the end of 1996 and 2007, prices actually went down by a similar percentage.

“So overall, when you look at the long term, prices have gone up by something like 1.3%,” he says.

Furthermore, Achim asserts that prices are not currently at an unsustainable level relative to the average income.

“The average apartment was worth 9.2 years of work in 1973, and today it’s something like 10,” he says. “So we’re a bit above the long-term average, but we’re still lower than previous peaks. In 1996, it was around 12 years of work.”

While Vered Dar, chief economist at the Psagot Ofek investment house, disputes Achim’s point that housing prices are reasonable in comparison to the average wage – “It’s definitely on the high side. Two years ago, it was low,” she says – she fully agrees that the current situation does not constitute a bubble.

“If you compare prices to where they were 10 years ago, you’re going to see that this doesn’t even start to look like a bubble,” Dar says. “Compare the end of 2009 to the end of 2000. Prices went up by 12% on a real basis; 12% in nine years, that’s nothing. Nobody would call that a bubble.

“So why do people call it a bubble? What are they talking about? The answer is that it may be 12% in nine years, but it’s also 17% in the past year, in real terms.”

Dar, however, doesn’t reject the possibility that the current situation may develop into a bubble. Should the upward trend continue for another year or two, she says, the definition might be accurate. But after one year, for prices to go up by 17%, “that’s a correction,” she says.

AND YET many are not reassured by such an assessment.

“I’m finding that the prices are very inflated,” says Amit Golan. “Every apartment that I go to see, there are multiple potential buyers. And although there are a good number of apartments on the market, given all these buyers, it really feels like a shortage.”

Golan currently rents a four-room flat in Modi’in with his wife and two daughters. While he is often on the road for his job, and thus is more flexible when it comes to where to buy, his wife works in Jerusalem. They had first moved to Modi’in because rent was reasonable, and either by car or by public transportation, Jerusalem was relatively accessible. Now, however, they face a problem.

“I looked in Modi’in, and I want to buy in Modi’in, but the prices are out of my reach,” he says.

According to real-estate agents with significant client bases in the city, such as Debbie Goldfischer and Shelly Levine, that Golan’s experience is increasingly becoming the norm is most certainly indicative of an economic trend.

“In Modi’in I’m very confident that this is a bubble, and that it has to burst,” Goldfischer states. After all, she asks, “how much can people pay?

“I had a house this morning… they want to put it on the market for about NIS 4.5 million. It’s 210 square meters, it’s semi-detached, and it’s one of the exclusive homes in [the Buchman neighborhood of the city],” she recalls. “Let’s be realistic, how much higher can prices get? If somebody wants to spend over $1 million, then why would they choose to come to Modi’in?”

Levine, in her occasionally gruff oratory style, offers a concise explanation as to what is driving the prices. “Modi’in has gone crazy,” she says.

Even the CEO of real-estate powerhouse Anglo-Saxon, Adina Haham, has noticed inflated numbers, although more so in Tel Aviv.

“While in Tel Aviv we’ve seen a drop in the prices of luxury apartments, they’re still not [at normal levels],” she says. “I mean, they’re really beyond all proportions, these luxury apartments.”

Jerusalem is no different. Upscale neighborhoods fill the capital, and new luxury complexes are being constructed every day. And although the municipality is trying to combat the situation – on Tuesday, City Hall announced that plans to build prestigious villas in the Kiryat Yovel neighborhood were being scrapped in place of apartments designated for young residents – there is much work to be done in order to make the city affordable.

But according to Dar, cities like Modi’in, Tel Aviv and Jerusalem – with their increasingly expensive real estate – are simply the exception.

“You can’t call [places like Modi’in, Tel Aviv and Jerusalem] a bubble. When you talk about a housing bubble, it’s about all of the country,” she says. “When you’re talking about the US, you’re not talking about what happens in the Lower West Side in Manhattan. If you say the US has a bubble, then it’s because of what happened to the prices of apartments, on average, in all of the US. That includes Tennessee, that includes Virginia, that includes Louisiana.

“You’ll always be able to find in every country a neighborhood in which prices have gone up, and in which prices have gone down So while [it may be true] about Tel Aviv, about Jerusalem, that isn’t a story about Israel; it’s about certain cities or neighborhoods.”

The construction and housing minister sees the situation similarly to Dar.

“Israel is not a bubble like what was witnessed in the US and Eastern Europe, when the banks gave away money without checking the ability to repay,” Attias said. “The Israeli market wasn’t flooded, but rather suffers from a shortage. Given this, there are certain areas in which prices are disproportionate, a situation which comes from contractors buying the land at exorbitant prices, and then rolling the costs on to those who buy their apartments.”

INTERESTINGLY, SOME insist that even the areas which are inflated are still worth the investment.

“Mark Twain once said, ‘Buy land, they’re not making it anymore.’ And in Israel, that’s very, very true,” says Re/Max Israel country manager Bernard Raskin. “We have a small country, a good part of it is desert. People need to live and work.”

Far from interpreting the state of the industry as a bubble, Raskin predicts that prices will only go up, and that buying now is the wisest choice.

“When the world economy improves, things are going to go crazy here,” he says. “The moment that the Israeli economy is healthy, hi-tech will take off again, people will be earning a lot more money and things will boom.”

Yet despite Raskin’s optimism, patience may not be such a bad choice – at least from the perspective of housing prices. The Middle East being the cauldron of tensions that it is, real estate here is particularly vulnerable to external factors. And while there is no telling when violence may flare up, the effect that it would have is undeniable.

“God forbid, one rocket hits Israel – or that there is renewed violence of some kind – it will affect the whole housing market,” says Goldfischer. “The situation – the housing bubble – is very fragile now, very fragile.”

Furthermore, even if the unexpected never occurs, neither might the expected. Those who cite the problem of supply and demand by noting the country’s geographical size, its growing population and – in some cases – its contracting borders may be overlooking one simple fact.

“Israel is not unique in the sense that it’s a small country, because there’s no problem to build a 20-, 30-, 40-floor apartment complex. So it doesn’t really make that much of a difference,” Dar says.

The real-estate market is very hot right now and naturally, after the dramatic housing crash in the US beginning in 2006, that puts it under the microscope. Investors are desperate for any sign of whether apartments throughout the country are excessively priced and destined to fall, or whether they’re not only sustainable, but still on the rise. And while many believe that the market won’t experience any drama over the next year, beyond that is clearly still a matter of speculation.

Perhaps Vered Dar puts it best when she says, “I can’t see prices going down in the next year. Ten years down the line, that’s a different story.”

In other words, the real-estate bubble – if it is a bubble – may indeed burst. But then again, maybe it won’t.    


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