Deutsche Bank has blamed low interest rates on the housing bubble. In a review of the Israeli housing market entitled "Is there a housing bubble?," Deutsche Bank research analyst Dan Harverd insists that mortgages are the main growth driver in the housing market and that interest rates have driven prices higher, not supply constraints.
Deutsche Bank said, "Our analysis shows that the decline in mortgage rates to all-time lows of 2.4% (vs. 5.5% average prior to 2008) has been the main factor driving housing prices higher rather than lack of supply. Prices started to rally in mid-2008 exactly at the time that interest rates declined and prime rate floating mortgages increased in popularity. Our analysis of the data shows that there was a certain inevitability to price appreciation given the extent to which mortgage rates declined."
Bank of Israel Governor Prof. Stanley Fischer cut interest rates to an historical low as a result of the global economic crisis and credit crunch in the final quarter of 2008. Harverd observed, "Not by coincidence, this was the starting point for the rally in apartment prices."
Deutsche Bank reported that since the start of 2009 the median apartment price has risen 28% to NIS 979,000 or $252,000. This compared with an average annual rise of 3% in the previous decade from 1998-2008. Deutsche Bank noted that the highest prices are in Tel Aviv where the median price of an apartment costs NIS 1.8 million, quadruple the price of the median apartment in the north. Prices in Tel Aviv have soared 46% since the end of 2008.
Deutsche Bank added that affordability levels are currently reasonable. Deutsche Bank said, "The average household now requires 87 months of net income to cover the median apartment cost, well above the long-term average of 76 months. While this may suggest prices need to decline, our analysis (that takes the rate environment into account) shows that affordability levels are currently marginally better than long-term averages. Indeed if the current low mortgage rate environment is maintained over the next two years, apartment prices would need to rise a further 12% for affordability to return to equilibrium."
Published by Globes, Israel business news - www.globes-online.com - on September 7, 2010
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