Fischer sees home price rises as beneficial

It is just bad luck that the younger generation wasn't invited to the party and cannot even dream today of buying an apartment.

Ironically a large part of the credit due to Stanley Fischer in his seven and a half years as Governor of the Bank of Israel stems from the flourishing of the domestic real estate market.

The public at large has been celebrating together with Fischer with absolution from the 40,000 couples that marry in Israel annually. There are 1.5 million homeowners in Israel and the price of an average apartment has risen by 60% over the past four years. 1.5 million Israelis have benefitted from this "wealth effect" which has made them feel much smarter and richer through their decision to buy an apartment - even if their actual ability to buy a better apartment has moved further away from them. And that same intoxicating feeling of wealth is one of the catalysts driving the public to splurge more and more money, which of course has been happily greasing Israel economic wheels in recent years.

The prime minister and finance minister are both celebrating with Fischer. Due to the rapidly accelerating real estate engine, we can boast to the entire world that Israel is "an island of stability." In 2004, before the Fischer era, tax income from real estate was NIS 3.7 billion annually. In 2011, it had risen to NIS 7.3 billion. And on top of that tens of billions of of shekels have gone into the government coffers from land sales and the huge rise in indirect taxes VAT, companies tax, income tax etc. borne out of the major rise in the number of deals in the market and the number of people employed in Israel's most popular sector.

The investors have celebrated with Fischer. In Israel there are hundreds of thousands of small real estate investors, whether the apartment fell into their hands as an inheritance or whether they bet on the right horse at the right time. While those around moaned about rising apartment prices, these investors went to the bank every month to deposit the latest rent check from their tenants.

And perhaps most important of all, while home prices here are going crazy, inflation that he is responsible for has not reared its ugly head. For some years now, for statistical reasons, inflation is measured according to rents, which is worth over 24% of the basket making up the Consumer Price Index (CPI), and not according to home sales prices. Thus although home prices have risen 34% between July 2009 and July 2012 in nominal terms, instead of hiking inflation by a fantastic 8.3%, the housing clause has only contributed 4.1% to the CPI as rents have only risen by a more modest 17%.

So while inflation has remained within the target range, the Governor of the Bank of Israel has been able to keep a low interest rate, and continue feeding the real estate bubble, and even concede that the low rate is the number one cause of the real estate price rises.

And rely on Fischer. Whoever is concerned that the land supply of Housing Minister Ariel Atias together with Fischer's new mortgage restrictions will change the balance of supply and demand, has not understood that he is looking at the wrong battle. With all due respect to the headlines that mortgages are making in the media, the real ammunition in Fischer's strategy is to quell the first part of the food chain. When he threatens and even prevents the banks from financing new deals for purchasing land and putting up projects, his control on regulating supply is almost absolute.

Therefore, when we keep expecting the "responsible adult" to deal with the housing problem, it is worth reminding ourselves that the flourishing real estate market is an important component of his curriculum vita. From his point of view, this celebration has only done the Israeli economy good and the main thing is only to control the level of the volume.

It is just bad luck that the younger generation - that wasn't invited to the party and cannot even dream today of buying an apartment began about a year ago to start making their voices heard. But all the rest politicians, investors, and homeowners must understand that it is all our children, and the hangover is to come.

Published by Globes [online], Israel business news - www.globes-online.com - on November 4, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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