No bubble in housing market, BoI says

Eckstein: Limited supply of land is main reason for rise in prices.

December 7, 2010 07:10
3 minute read.
Apartment buildings in Beersheba

beersheba real estate 311. (photo credit: Courtesy)

There is no bubble in the local real-estate market, even though housing prices are rising faster than rents, Bank of Israel Deputy Governor Zvi Eckstein said Monday.

“Housing prices in Israel and worldwide are characterized by a long-term upward trend,” he said at the Israel Geographical Association’s annual conference in Jerusalem. “This trend constitutes a financial risk when the business cycle starts to turn bearish.”

Real-estate bubbles around the world were characterized by a significant decoupling between housing prices and rents,” he said. “At the moment, there is apparently no bubble in housing prices in Israel, despite the beginning of a worrying trend of an increase in housing prices at a faster pace than the increase in rent.”

Eckstein said the Bank of Israel was taking steps to prevent such a situation. In recent months, he said, the central bank has announced macroprudential measures to tighten mortgage conditions to cool demand for housing until the housing supply increases significantly.

Eckstein said the limited supply of land for residential construction was the main reason for the rise in prices.

“While the Israel Lands Authority is the almost exclusive owner of land in the country, it is involved in only 40 percent of residential building initiatives,” he said. “Such dominance by the government in land ownership is peculiar to Israel. The Israel Lands Authority’s lack of incentives for business development is among the factors behind the upward pressure on prices during recent months, alongside the low interest rate in the economy and the increase in credit for mortgages.”

Significant sales of state lands designated for building would increase competition and private business initiative, thereby reducing land and housing prices, Eckstein said. The immediate focus should be to provide tax breaks that would encourage more construction, he said.

Housing prices increased 1.9% in the third quarter and 19.7% over the past 12 months, according to the Central Bureau of Statistics. The volume of new mortgages granted in October increased 11% compared with September, to NIS 3.58 billion, according to the minutes of the Bank of Israel’s discussions setting the interest rate for December, which was published Monday.

There was an increase in all types of mortgages, with the most prominent one, 27%, in CPI-indexed mortgages at floating interest rates.

The housing component of the Consumer Price Index (based on rentals) was the main inflationary factor over the past year, the minutes said. Over the past 12 months the CPI increased 2.5%, while the index excluding housing rose 1.4%.

“In light of the gap that has arisen between the increase in house prices [19.7% in the 12 months to September] and the increase in rentals [94.7% in the 12 months to October] rentals may continue to increase,” the minutes said.

“The [rentals] housing component is the main reason that inflation is expected to be above the midpoint of the target inflation range in the coming year.”

Trend figures point to stabilization in the volume of property transactions following a continued decline since the third quarter of last year, the Finance Ministry said in its “Red Lights” economic survey for October on Monday.

During October, 8,800 apartments were bought, up 46% compared with September, which was the lowest level since October 2008. The volume of home purchases in October was up 11% compared with last October. In September and October the number of property deals declined by an average of 8% compared with the same months last year.

New-home prices fell 1% in October compared with September, Finance Ministry figures showed.

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