Fischer: Low interest drove housing prices up

Tel Aviv-25 index rose over 50%, apartment prices over 30% in last 12 months.

May 4, 2010 00:09
2 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)

Low interest rates have boosted prices in the real-estate and financial markets, Bank of Israel Governor Stanley Fischer said Monday.

“During the first quarter of 2010, prices of financial assets – shares and corporate bonds – and house prices continued to rise,” he said in a letter accompanying the inflation report for January-March.

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“Around the world, share prices also rose, but somewhat more slowly then in Israel,” Fischer said. “The increase in share prices worldwide and in Israel is due in part to the economic recovery and the expectation that it will persist. But it is certainly also partly the result of the low interest rates prevailing in most countries. Similarly, the rise in house prices in Israel is also in significant part a result of low interest rates.”

The Tel Aviv-25 stock index rose more than 50 percent over the past 12 months, including 6% since the beginning of the year.

Since the middle of 2008, average apartment prices in Israel jumped more than 30%, following several years when they hardly changed, as declining interest rates and a downturn in financial markets led investors to shift from riskier assets to the real-estate market. The trend accelerated last year, after interest rates reached a record low of 0.5% in March.

The boom in the local real-estate market has hardly been affected by the global financial crisis, while in other developed countries property markets slowed down or experienced a crisis. Due to high demand for investment apartments and limited supply, property prices have continued to rise.

Israel had the third-strongest growth in property prices last year (21.3%), after Hong Kong (27.6%) and mainland China (25.1%), according to the Knight Frank Global House Price Index.

Last week, the Bank of Israel left the interest rate for May unchanged at 1.5%, partly due to concerns about the debt crisis in Europe. The central bank has increased the interest rate four times since August to bring inflation back into the government’s target inflation range of 1% to 3%.

Inflation in March moderated to 3.2%, from 3.6% in February, but remained above 3% for a fifth month.

“At this stage, the central bank assesses that it will increase the interest rate gradually, at a rate determined by the inflation environment, the entrenchment of growth in Israel and around the world, the development of shekel exchange rates and of asset prices, and interest-rate adjustments by other central banks,” the inflation report said. “The decline in inflation will continue due to the effective appreciation of the shekel in the last few months and the negative output gap that resulted from the impact of the global crisis on economic activity in Israel.”

The annual inflation rate will moderate in 2010 and enter the target range by midyear, and in a year’s time it will be 2.2%, the Bank of Israel said.

The central bank last month raised its growth forecast for 2010 to 3.7% from 3.5%. It expects a decline in the unemployment rate to an average of 7% from the current 7.3%.

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