OECD: Israel still at risk of housing bubble

Organization for Economic Cooperation and Development warns state at risk in its biennial report on Israel.

building311 (photo credit: Ariel Jerozolimski)
(photo credit: Ariel Jerozolimski)
The Organization for Economic Cooperation and Development presented its biennial report on Israel Monday, praising it for emerging strongly from the 2008-09 global downturn but warning that it was still at risk of a housing bubble.
This was the first report submitted on Israel since it became a full member of the 34-nation organization of developed economies last year.
The report said increases in housing prices had eased, if not stopped altogether, and that indicators such as price-to-rent ratio had not yet reached what are thought to be critical levels.
But it added that there remains the possibility of a hard landing and that house prices and loan repayments may reach bubble proportions, “heightening the risk of a sharp and damaging correction.”
The OECD applauded the Bank of Israel for taking welcome macro-prudential measures – which included increasing loan-loss provisions for mortgage lending and limiting the variable-rate component of mortgages to one-third. But it warned that further macro-prudential tightening and faster land release by the Israel Lands Authority might be warranted.
Looking at the broader picture, the report said Israel’s economy had passed through the global financial crisis in relatively good shape, but was now suffering alongside others from the continuing effects of the renewed global crisis and regional geopolitical tensions.
So far there have been no major failures in the financial sector or need for any extraordinary fiscal stimulus, which has helped avoid a substantial increase in public debt, the report said. It singled out for mention new finds of offshore natural gas, which it said would strengthen Israel’s fiscal position, decrease dependence on imported fuels and improve options regarding energy security.
The report described as “laudable” this year’s reform that increased the state’s share of net profits from oil and gas sales from one-third to 52-62 percent.
“An independently managed sovereign wealth fund with an appropriately modest drawdown rate should now be established to ring fence the revenues,” it recommended.
Among other key recommendations, the report warned that the country’s 2012 budget should not be re-opened; that achieving deficit targets needed to reduce public debt to 60% of GDP by 2020 should remain the top priority; and that the government would need to adopt additional revenue- raising measures on top of the likely cancelation of scheduled cuts in corporate taxes and upper-bracket personal income taxes. Measures could include “advantageous tax reforms” like higher environmental taxes and VAT, it said.

Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fischer, who received the report from an OECD delegation, both called it the most important work the organization had conducted on Israel.
“It validates the government’s policy of the past few years and strengthens the need to safeguard the fiscal framework, particularly in regard to a budget ceiling,” Steinitz said.