Investor demand rises anew

In 2011, demand for housing will outstrip supply, so prices will continue to creep upwards.

By JAMES HARRIS
Chart: Quarterly purchases of dwellings 311 (photo credit: Ministry of Finance)
Chart: Quarterly purchases of dwellings 311
(photo credit: Ministry of Finance)
The local real estate market is going through turbulent times. Demand for housing is greater than the supply – i.e., housing starts – consequently, prices are constantly rising. A study by the Central Bureau of Statistics (CBS) showed that average real estate prices for the 2008-2010 period rose by 43 percent and by more than 60% since mid-2007. According to the RE/Max real estate brokerage network, average real estate prices rose nationwide by 14%. Single-family homes in the southern districts rose by 25%.
These are hefty price rises; consequently, it has become a social issue because the number of people who cannot afford to buy an apartment is growing daily.
And with good reason. While average real estate prices have risen by 14%, average salaries have risen by just over 6% in nominal terms and by 3% in real terms.
As rising real estate prices have become a major social problem, they have also become a major political problem. Recently Interior Minister Eli Yishai, who is also the head of the haredi political party Shas, threatened to leave the coalition unless the government addressed the problem of rising real estate prices.
Prices are rising because supply of new housing falls short of demand. Approximately 38,000 households are created every year. This includes newlyweds and singles leaving the parental home. To this is added demand by overseas buyers and properties gone derelict -- another 3,000, which amounts to approximately 41,000 in all.
During the past 10 years, housing starts have amounted to only 316,942, or an annual 31,694 on average -- a 10-year shortfall of 93,058 dwellings.
These figures explain why prices are rising constantly.
In 2010, prices rose by 14%. Bernard Ruskin, general manager of RE/Max Israel, believes that in 2011 prices will increase on average by up to 11%.
“The government is taking steps to increase supply, but these measures will only be felt in two or three years. In 2011 demand will still outstrip supply; therefore, prices will continue to creep upwards.”
Renewed demand in Q4 2010
According to figures published recently by the Finance Ministry, demand for real estate during the fourth quarter of 2010 increased substantially and reached the levels obtained in the third quarter of 2009. This amounted to 28,600 -- a rise of 11% compared to 23,000 in the preceding quarter. This includes all real estate transactions, such as apartments sold to buy larger accommodations and the acquisition of both new and secondhand housing. During the first three quarters of 2010, demand had moderated and there were hopes that the fall in demand would dampen the rise in prices. But the figures for the fourth quarter proved that demand is on the rise once again, despite all the efforts of the Finance Ministry, the Housing Ministry and the Bank of Israel.
The efforts of these government bodies are being neutralized by strong renewed investor demand. This may be explained by the low interest levels and the low yields in other types of solid investments.
In the fourth quarter of 2010, real interest rates had fallen to 1%, which meant that the yield on bank deposits or on savings accounts was very low -- 2% to 3% at the most.
The yield on real estate investments was much higher.
The interest rates levels have a significant bearing on investor demand.
In the fourth quarter of 2008, the real interest rate was 3.5%. During those three months, investors acquired 5,000 apartments. By the third quarter of 2009, real interest rates had fallen to minus 1.8% and the amount of apartments acquired by investors shot to over 9,000. In the fourth quarter 2010 , the number of apartments acquired for investment purposes amounted to 8.648 -- a rise of 9.7% compared to the corresponding quarter of 2009 and a rise of 32% compared to the previous quarter.
Investor demand is influenced by real estate prices and by prospective yields -- i.e., rentals. That is why demand in Haifa and Beersheba is so high.
During the last quarter of 2010, the number of apartments acquired in Beersheba amounted to 4,094 -- a rise of 29.4% in relation to the corresponding quarter in 2009 and by 23.8 in relation to the third quarter. In Haifa, the number of apartments acquired amounted to 4,169 -- a rise of 9% compared to the corresponding period in 2009 -- and by 20.7% in the previous quarter. Investor demand in these two cities is abnormally high: 1,411 in Haifa, which adds up to 33.85%; and 1,373 in Beersheba, or 33.54% of all apartments acquired during that period. In relation to the third quarter of 2010, investor demand in the fourth quarter of 2010 rose by 33.3% in Beersheba and by 31,000 in Haifa.
The reason for the popularity of Beersheba and Haifa among investors is price. In Haifa, the average price for a three-room apartment is NIS 600,000. In Beersheba it is NIS 400,000. The national average for a three-room apartment in the corresponding period is NIS 1,049,927. Haifa and Beersheba are both university towns with a large transient population. Consequently, rentals are relatively high and can generate an annual yield of 5% to 6%.
Overseas buyers are back
Another reason for increased real estate demand in the last quarter of 2010 is increased demand from overseas buyers.
In the last quarter of 2010, overseas buyers acquired 900 properties -- a rise of 26% compared to the previous quarter. Most experts believe that demand from that segment will increase during the whole of 2011. Most of the demand is from the Diaspora -- Jews who want a foothold in Israel. Some of the demand is for investment purposes. Demand from both is expected to rise because the desire to buy a property in Israel is rising, and the means to that end is increasing. The economic crisis that shook the world is abating; and with increased economic activity in Western Europe and North America, there is more money to spare, and the number of those able to afford a second home is on the increase. And so is the desire to buy property in Israel. Some countries of Western Europe are becoming somewhat uncomfortable for the Jews living there.
Experts say that prices in 2011 are set to rise. According to Erez Cohen, former chairman of the Israel Land Appraisal Association, prices are set to rise in general terms but not everywhere.
“Prices in the Tel Aviv metropolitan area have reached their full potential.
I would not advise investors to buy property there. Real estate prices have a good chance of rising in what I would call the outer, outer ring of the Tel Aviv metropolitan area. Prices in the inner ring, such as Givatayim and Ramat Gan, have reached a certain limit. The outer, or second ring, which includes Petah Tikva and Rosh Ha’ayin, has also reached a certain limit. The best investment opportunities are in the third ring, or the outer, outer ring, which includes Rehovot and Gedera in the South and Hadera in the North,” says Cohen.
“Outside the Tel Aviv rings, I have a feeling that prices in Ashkelon may rise in the future,” he continues.
“In the southern districts, the hefty increase in demand that is fueling the hefty price rises will moderate.
The same holds true for properties in Haifa and its metropolitan area. Prices in Jerusalem have also reached their maximum potential.”