Housing market seen to be cooling off

There is increasing evidence supporting the feeling that the housing market is threatening economic stability.

By YANIV HEVRON
December 1, 2010 23:14
2 minute read.
SHIKUN & BINUI REAL ESTATE

SHIKUN & BINUI REAL ESTATE. (photo credit: SHIKUN & BINUI REAL ESTATE)

 
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There is increasing evidence supporting the feeling that the housing market is threatening economic stability, with the government and the Bank of Israel taking steps aimed at cooling the overheated property market.

Israeli housing prices have surged by some 51 percent since 2007 and by 20% in the past year. The latest evidence of concern regarding the possible impact of the real estate market on the economy came with the announcement of measures by Prime Minister Binyamin Netanyahu earlier this week aimed at lowering property prices.

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Only a month after the Bank of Israel announced new restrictions on granting mortgages, Netanyahu, together with central bank Governor Stanley Fischer, Finance Minister Yuval Steinitz and Housing and Construction Minister Ariel Attias, unveiled plans to increase supply and encourage contractors to build more.

The announcement illustrates the fact that the government realizes that the central bank can’t stand alone on this front anymore, and that the government needs to play an active role in increasing supply.

While the Bank of Israel’s moves are aimed at addressing the demand side of the equation, the government’s moves are aimed at impacting housing supply.

We believe that in the near term the pace of rising prices will slow, the trend might even change and prices will start to decline. If the government continues to take further steps, this might even lead to an overall long-term decrease in property prices.



While the focus is currently on the housing market, the consumer price index for October rose by 0.3%, slightly above analysts’ expectations. The Bank of Israel is now facing a tough decision. On the one hand, a rise in inflation expectations, soaring housing prices and rising rates in emerging markets support another rate hike. On the hand, the rise in exports has been slowing and the government’s plans to cool the property market are putting pressure on governor Fischer to leave rates unchanged.

It is difficult to predict what Fischer will do, but we believe that the governor will vote in favor of another rate hike as the shekel continues to depreciate.

It appears that the Bank of Israel will continue to intervene in foreign currency trading and will buy as many US dollars as required. As long as the Finance Ministry does not intervene to prevent this from happening, this activity will continue.

In the bonds market, we have witnessed a rise in the yields of government bonds following the rise in yields in the United States. At this stage it would be prudent to wait for more economic indicators before taking any further steps.

Yaniv Hevron is the head of macro-economics and strategy at investment house Excellence Nessuah.

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