Leiderman: Interest rate still pushing up home prices

Leo Leiderman

Bank Hapoalim chief economist: Excess housing demand will persist even after an investment apartment tax hike.

Housing prices in Israel will continue climbing, Bank Hapoalim (TASE: POLI) chief economist Prof. Leo Leiderman believes. In his remarks at a real estate conference organized by the Steinmetz Haring Gurman & Co. law firm and the Ernst & Young Israel accounting firm, Leiderman predicted that housing prices would continue rising by 5% a year, saying, "The negligible interest rate and limited supply of housing have been, and remain, the dominant factors in the development of housing prices.

"The tax hike on real estate investors can be expected to rein in demand for housing to some extent, but even after the tax is raised, the housing market in Israel will continue to feature excess demand that will contribute to higher prices," he added. Leiderman also said that the influence of the central banks in Europe would keep the interest rate in Israel very low, which would continue to stimulate housing demand, even if the US Federal Reserve raises the interest rate in the US this year or next year.

In the medium and long term, Leiderman predicts, "Here, too, the interest rate in Israel is influenced primarily by global interest rates, and these are expected to remain low for at least the next two years. The negligible real interest rate prevailing in the West and in Israel has made investing in real estate more and more attractive." Leiderman went on to say, "Whether you're talking about investors, individual savers, or investment institutions, the search for a more reasonable return than the negligible interest on government bonds will lead people to invest in housing, income-producing real estate (also through REIT funds), commercial real estate, and infrastructure projects. This is a global trend, and we're part of it."

In what could be regarded as indirect criticism of the housing purchase tax hike for investors, Leiderman commented, "Buying an apartment for investment is a perfectly legitimate action by individuals and families trying to find investment instruments that are more attractive than government bonds. Today, for example, the yield to maturity on five-year linked Israeli government bonds is -0.2%, and the adjusted 10-year yield is 0.45%. For households, and looking forward to the future and after retirement, these interest rates definitely generate substantial interest in real estate. This process of switching to investment in real estate is far from over, particularly given the expected prolonged persistence of negligible real interest rates."

Concerning Minister of Finance Moshe Kahlon's plan to lower housing prices, Leiderman said that it was "too early for a general assessment of the plan, since according to housing czar-designate Avigdor Itzchaky, what has been reported so far is only the first two stages of a five-stage plan that also addresses rental housing."

Leiderman nevertheless added, "Since housing prices are very much affected by future expectations, and since the government plan to slow down housing price rises requires the public to regard the plans as credible if it is to be successful, it is important that the overall government plan be presented as a unified entity as soon as possible. Otherwise, it is doubtful whether proposed cabinet decisions and separate announcements for each part of the plan will succeed in breaking down expectations of continued 5% annual price rises."

Published by Globes [online], Israel business news - www.globes-online.com - on June 15, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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Leo Leiderman
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