Global Agenda: The me-too bubble

'We have gotten to know Bank of Israel Governor Stanley Fischer pretty well, and it’s abundantly clear that he is as poor a tactician as he is an outstanding strategist.'

stanley fischer (photo credit: Louise Green)
stanley fischer
(photo credit: Louise Green)
Many Israelis, from huge global corporations to ordinary households, made major efforts to take part in the global real-estate bubble that began in the mid-1990s and collapsed in 2006-2007. As usual in these situations, those who got in early did very well for themselves, while the late-comers – always the majority in these situations – fared poorly, or, if they borrowed too much, simply got creamed.
But while Israelis were frolicking in real-estate markets around the world, their domestic real-estate market remained mired in the doldrums. For the entire period of the greatest synchronized boom ever seen, Israel was conspicuously absent.
There are, of course, reasons for that: The bottom line is that, by missing out on the boom and the bubble, Israel and its banks also succeeded in avoiding the crash and its associated woes. But even knowing the outcome has not prevented a perverse form of extreme lemming-type behavior taking hold among rich Israelis. They are determined to have their own real-estate bubble, and, sure enough, they have succeeded.
It is essential to understand that what is going on in the Israeli market is not, even on a relative scale, remotely comparable to what happened in the UK, let alone the US, or Ireland. Furthermore, even though the local lemmings are determined to run straight off the cliff, the banks are considerably more reluctant than were their foreign peers to be dragged along and down with them.
But the critical factor is that the central bank – the player whose sins of commission and omission did so much to generate and enhance the disaster in the Anglo-Saxon countries in 2003-2007 – is determined to take the opposite path to the one that led to ruin elsewhere.
We have therefore seen the Bank of Israel become steadily more engaged in efforts to end the house-price boom – after it accepted that this was happening and that it represented a serious potential danger to the Israeli economy. Other government units, notably the Construction and Housing Ministry and the Finance Ministry, also are increasingly involved in this effort. This more or less ensures that the bubble, or mini-bubble, or whatever title it merits, will be eliminated.
But because the full force of government intervention is now being focused on the real-estate market, there is likely to be huge overkill. After all, after more than five years on the job, we have gotten to know Bank of Israel Governor Stanley Fischer pretty well, and it’s abundantly clear that he is as poor a tactician as he is an outstanding strategist. That much is apparent from his record in managing interest rates, where he has flipped and flopped in normal times but was unflappable when the storm struck.
Similarly with regard to exchange-rate policy: he revived this tool in response to the severe over-valuation of the shekel and eventually, after a war of attrition that lasted far too long and cost too much because of his tactical mistakes, he eventually inflicted a resounding defeat to the foreign financial institutions that had been driving up the shekel’s value.
Now Fischer and Supervisor of Banks Roni Hizkiyahu are fully focused on the real-estate market. They are bringing to bear their entire arsenal, including raising interest rates, tighter lending rules for mortgages, more-intensive oversight of banks, driving out some of the “innovative” features in this market, such as “buying groups,” and more.

Fischer is like a chief of staff whose army has to neutralize an opponent, and, unsure how much force is needed or which sort, he is unleashing the artillery, tanks, missiles, manned bombers and special forces simultaneously. The result will be that the bubble won’t merely be dealt with – it will be pulverized and annihilated, probably with a good deal of collateral damage.
But the underlying problem of the Israeli real-estate market is not that there is too much money and hence excessive demand, which must lead to inflation of house prices. This is indeed the case, but it merely serves to highlight a dire shortage of supply, especially of small- and medium-sized non-luxury apartments.
Only when the problems on the supply side are addressed – effectively rather than via bombastic statements by ministers and squabbling between their ministries – will the market itself be able to resume proper functioning.