Real Estate: Reality check

Despite the fact that during the past few months prices have risen slightly, there is no doubt that the upward price trend seems to be changing. But is it really?

Real estate market (photo credit: Courtesy)
Real estate market
(photo credit: Courtesy)
In Israel between 2007 and 2017, residential real estate prices doubled. During that period, prices registered annual increases. Now, from September 2017 to September 2018, there seems to be a sea change. The rise in residential real estate prices has ceased.and there were months when prices actually fell.
Despite the fact that during the past few months prices have risen slightly, there is no doubt that the upward price trend seems to be changing. But is it really? If prices stabilize, it is because the supply and demand are balanced. But this is not the case. Prices have fallen despite the fact that there has been no increase in the supply factor. Prices have fallen because during the past three years, the government has adopted some poor policies, which means that the current price falls will probably be temporary.
What are these unfortunate policies? in my opinion, they are the following: The buyer’s price program sells dwellings at what can be described as subsidized prices, as the price of land in certain areas is subsidized. The program started in 2015. Finance Minister Moshe Kahlon took an old program that had been gathering dust for years, and now it is the most important program in the government’s housing policy. Its aim is to make dwellings available to young couples and people who don’t own a home of their own.
Currently, every third dwelling sold in Israel is the product of that program; but it is not a long-term solution to the problem of expensive real estate. The lands subsidized are located in peripheral areas. Those who buy these dwellings don’t intend to live there themselves. For them, it is a means to rent them out and use the money to rent a dwelling in a more central area. This means excess supply in some peripheral areas and tight supply in others, primarily in central areas of the country.
The current government policies have a very negative impact on the most important segment of the real estate market -- home owners who want to upgrade their living standards. Because most construction work is currently dedicated to the buyer’s price program, the amount of new construction available for those who want to upgrade is limited. Under these circumstances, irrespective of what is happening now, the upward pressure on residential real estate prices will increase.
Another negative aspect of the current residential real estate market is the limited success of the urban renewal programs, those centered on strengthening existing condominiums and adding more floors and consequently more apartments, as well as the tear and build projects of tearing down old residential buildings and constructing larger, more modern buildings in their stead. The reasons for the limited success include the debilitating bureaucracy and restrictive regulations, which inhibit profitability.
Another government program that is doing more harm than good is rooftop agreements. These are agreements between the central government and the municipal authorities whereby the government will finance the infrastructures necessary to develop new and large neighborhoods. The program was planned to add 250,000 new dwellings over the next 10 years.
A number of such agreements have been signed. But to date, none have been implemented, and I doubt if they ever will be. These agreements are signed in peripheral areas where demand is very weak, and the construction of the necessary infrastructures would cost billions.
Another problem in the real estate industry is the dramatic fall in investor demand both local and overseas. Up to some three years ago, investor demand made up to one-third of the total demand for residential real estate. In 2018, it has fallen to less than 14%. But this fall is temporary and will increase in the near future.
What does all this mean on the practical level? It means that despite the figures regarding the projected increase in the supply of housing, in practice it is just that -- a projection. The increase in supply, which is the only way that prices cannot only come down but even stabilize, is an illusion. In practice, the supply of housing has not only not risen, but it has actually contracted. Consequently, the perception of a change in direction in the trend in residential real estate prices is erroneous.
I strongly believe that in 2019, residential real estate prices will rise with a vengeance. In 2019, demand may register sharp rises. This is because the artificially constrained demand of the last two years -- i.e., canned demand -- is set to break through once again. This includes home buyers who will realize that prices are not going down, as well as in investors. For the latter, interest rates are not going to increase enough to make investing in bank deposits or savings accounts attractive.