"We are on the threshold of a turning point in housing prices in Israel. It will take the public a little more time to realize this; otherwise, prices would already be falling," Excellence Investments Ltd. (TASE: EXCE) chief economist Yaniv Hevron says today in his economic forecast for Israel and the world.
Hevron cites several factors that he expects to bring about a turning point in housing prices in 2017. "The mortgage interest rate is projected to rise by a further 0.5% in 2017, following a 0.8% rise in 2016, which will retard demand somewhat. One reason for the mortgage rate rise is upward pressure on global bond yields, which affects Israeli government bonds. The mortgage interest rate is critical for those purchasing their first home, but even more so for investors in the housing market. Higher interest rates mean that there is no certainty that the return from rents will cover the monthly mortgage payment to the bank. It is more likely that investors will have to add several hundred shekels a month to the rent they receive in order to make the monthly payment to the bank. In our opinion, this is likely to prove the breaking point for the Israeli investor, who for years has become accustomed to having several hundred shekels left over from the rent he receives after making his monthly payment to the bank," Hevron explains.
Hevron believes that the tax on a third housing unit will also affect the residential real estate sector. "Taxing a third housing unit will reduce the number of housing units offered for rent. The main damage will be to owners of housing units in outlying areas, on which the return has been higher and more attractive to investors in recent years. NIS 1,500 from the monthly rent is liable to be too hard a blow for them, and demand from those investors may ground to a halt in the short term," he predicts.
Hevron also states that the tax on a third housing unit, combined with a rise in the mortgage interest rate, will also cause a rise in rents. "A more expensive mortgage will cause investors to demand a higher return on their investments, and we therefore believe that, in addition to the tax on a third housing unit, an increase in the mortgage interest rate will also lead to higher rents. Expectations of a change in housing prices are likely to increase the demand for rental housing initially, which could support rents," Hevron writes.
Additional supply: The wallet companies reform
Another factor likely to help depress housing demand, which according to Hevron deserves more attention, is the proposed personal service corporation reform. "The law requires owners of personal service corporations to also pay tax on the profits accumulated in the company. In other words, if a personal service corporation owner buys a housing unit with the company's money, the current version of the new reform requires him to pay the marginal rate of tax derived from the value of the property. If he does not have the necessary cash for this, he will sell the property. This action is also likely to contribute to a larger supply, and reduce demand pressure."
Hevron adds, "Buying a housing unit is now become much less worthwhile and far more risky than in the past. The Israeli public, however, is particularly skeptical about a possible change in the trend. Other government actions and the higher mortgage interest rate will halt the rising prices in the market."
At the same time, Hevron warns that additional government action will be needed in order to turn a halt in price rises into a reversal of the trend. "Without a substantial increase in construction and the creation of real expectation of a change, sitting on the fence by the public is likely to prove temporary, and to give way to another wave of rising demand."
Published by Globes [online], Israel business news - www.globes-online.com - on December 25, 2016
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