Jerusalem Post Editorial: Fischer’s message

Israel’s spiking real estate prices are staple fodder for populist cannons. Politicians and opinion-molders alike love hyping the gripe and proposing facile remedies.

Construction (illustrative). (photo credit: REUTERS)
Construction (illustrative).
(photo credit: REUTERS)
Israel’s spiking real estate prices are staple fodder for populist cannons. Politicians and opinion-molders alike love hyping the gripe and proposing facile remedies.
The trouble is that much of what plagues us is not homemade.
Worse yet, by its complex nature it defies magic solutions.
This is what US Federal Reserve Vice Chairman Stanley Fischer – the former governor of the Bank of Israel – in effect told us in his lecture last week at the Interdisciplinary Center Herzliya.
Addressing the global issue of rock-bottom interest rates, Fischer reminded us that Israel’s near-zero rate perforce increases housing prices. He emphasized this on the same day on which the Bank of Israel announced that our benchmark interest rate would be left unchanged for the third straight month at the historically low 0.1 percent.
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It is not as if the central bank had much choice given financial circumstances overseas. The only way to assure workable stability for the shekel is to keep the interest rates where they are.
Yet this, contrary to populist mantras, is what pushes our real estate prices ever higher. As Fischer noted, this is hardly an Israeli only phenomenon. Housing prices rise, he argued, wherever there is zero inflation and a functioning banking system – as is the case in Israel.
Under these conditions, property prices have nowhere to go but up. Fischer cited Norway, Singapore and Hong Kong to illustrate that this is not an Israeli-made predicament.
Fischer’s words of wisdom are important and must be kept uppermost in our minds. More often than not, tantalizing cure-alls dangled before us by self-appointed omniscients are misleading.
It is deceptively easy to find fault with nitty-gritty facets of official procedures and guidelines. Yet in the real marketplace, comprehensive overhauls might not be attainable.
At most only short-term palliatives to the housing shortage are feasible.
The primary impediment to quick fixes is the fact that Israel is a tiny country where demand will always exceed supply. Moreover, despite what some politicians pretend, Israel is not an island. It is deeply affected by global economic swings and it cannot operate as if it enjoys immunity to external crises.
Like it or not, our housing market is directly affected by international currency fluctuations – which cannot necessarily be foreseen and over which no Israeli government can claim to exercise significant control. Most striking was the credit crunch of 2008 that sent all economies reeling and whose aftereffects are still felt.
Zero interest rates abroad motivated investors and speculators to shift their assets to wherever they could earn even marginally higher incomes. Slightly higher Israeli interest rates lured overseas depositors. This in turn led to the overvaluing of the shekel.
A strong shekel should not be a source of national pride.
It cuts deeply into the competitiveness of exporters, costs them markets and could result in insolvencies and layoffs.
To avoid such dire consequences, especially joblessness, the Bank of Israel had no alternative but to reduce the benchmark interest rate to the unparalleled 0.1 percent.
But low rates trigger their own vicious cycles.
Local account-holders lose by leaving their savings in the bank. Having no substitute for safe, conservative investments, many choose the reliable option of buying a second apartment. This automatically raises demand, and prices, too.
Young couples, lured by low interest, risk taking out huge mortgages of the sort never previously accessible in this country. The availability of such mortgages at extraordinarily tempting rates creates yet another surge in demand that, inevitably, further raises prices.
Any politician not courageous enough to acknowledge this core feature of the housing bubble is being disingenuous, and this is putting it mildly. The suggestion that all can be blamed on given individuals, or that it is something that can be instantly corrected by clever maneuvers, is patently one-dimensional and illusory.
The industrialized world, almost without exception, is in the throes of economic distress – admittedly of varying severity.
We cannot escape the fallout, as Fischer cogently underscored.
The best we can do is to prevent the injurious interaction between rising real estate prices and record low interest rates from getting entirely out of hand.