After many years during which investors accounted for a high proportion of housing purchases, recent surveys by the Ministry of Finance chief economist found that the number of people buying housing for investment is falling every month, as is their proportion among home buyers. The figures show that not only are investors buying fewer housing units; they are also selling more housing units.
The Ministry of Finance explains that the change in the buying and selling habits of real estate investors is a result of the measures taken by the ministry to cool off the market, such as eliminating the exemption from betterment tax, increasing purchase tax for housing investors, the law imposing a tax on owners of a third housing unit, and the buyer fixed price plan. According to an analysis by Migdal Capital Markets, the government's measures are not necessarily what cooled the market off; the main factor was that after many years, returns on housing units are not what they once were.
According to data compiled by Migdal Capital Markets, based on Central Bureau of Statistics figures, the viability of buying a housing unit for investment has declined steadily over the past two years, primarily due to the turnaround in the gap between the return from rent and the interest rate.
In order to calculate the return on a housing unit, an index has been devised that calculates the ratio of the monthly rent, multiplied by 12 months, and the average housing unit price. Migdal admit that "this framework obviously has many disadvantages: on the one hand, an increase in housing prices cannot be predicted, while on the other hand, additional rent costs in leasing a housing unit, such as renovations and making over the housing unit, were not taken into account; nevertheless, it gives an indication of the prevailing trends."
The rates of return calculated from the first quarter of 2015 to the fourth quarter of 2016 show that while the average return in the first quarter of 2015 was 3.28%, the return declined in the succeeding quarters, reaching 2.99% in the fourth quarter of 2016.
The picture is consistent in all districts: a decline varying from 0.35% during the time period in the northern suburbs of Haifa (from 3.03% to 2.68%) to 0.12% in Haifa itself (from 3.2% to 3.08%).
Interest rate trends
At the same time, the Migdal Capital Markets economic department also examined the trends in the average interest rate on unlinked shekel mortgages versus the "return on a housing unit," "in order to see whether such a deal will be worthwhile for an investor who assumes that housing prices will remain unchanged, and whose cost of capital is the average mortgage interest rate."
This examination used the average mortgage interest rate and the average interest rate on 5-10-year mortgages. The figures show that while the return from rent declined over the past two years, financing costs rose substantially during the same period. The average mortgage interest rate in the first quarter of 2015 was 2.26%, while by the fourth quarter of 2016, two years later, it had risen to 3.37%.
At the same time, the interest rate on 5-10-year mortgages also rose during this period, from 2.39% at the beginning of 2015 to 3.77% at the end of 2016.This substantial rise has made the purchase of housing more expensive, and has reduced an investor's return.
Highest return: small apartments in the north
Migdal Capital Markets also examined the return for various housing units all over Israel, based on Central Bureau of Statistics figures, in the fourth quarter of 2016, and revealed major differences between them. As expected, the return is higher in outlying areas, although the risk of being left with an unoccupied housing unit is also greater.
According to the figures, the highest return obtainable was 4.49% for 1.5-2-room apartments in the northern district, followed by 4.34% for 1.5-2-room apartments in the northern Haifa suburbs and 4.07% for 1.5-2-room apartments in the southern district.
At the bottom of the table were 3.5-4-room apartments in the Tel Aviv district with a 2.25% return. 4.5-5-room apartments in the Tel Aviv district had a 2.57% return, while 4.5-5-room apartments in Haifa had a 2.61% return.
Again, this takes into account the average housing price, compared with the average rent, as reflected in the Central Bureau of Statistics data. It cannot be ruled out that rather than either the new tax on investors or the mood in the market motivating investors to sell their housing, buying housing units for investments is simply less worthwhile than it was two years ago.
Furthermore, the examination by Migdal Capital Markets did not address another factor - the expected improvement in a housing unit purchased for investment. Quite a few investors buy housing units not just for the return from regular rent. They expecting housing prices to go on rising, enhancing the value of their property and providing them with an exit after a few years.
No certainty that expectations have changed
At this point, one of the most significant things coming into the picture is the matter of expectations. If an investor believes that prices will go on rising, the lower return will not deter him. In the Ministry of Finance surveys, the chief economist department analysts also note that this is not certain. A decline in activity by investors can be caused by a change in expectations, but as the figures show, the purchase of a housing unit for investment has become less economically worthwhile over the past two years in the short term. If the additional purchase tax and the tax on a third housing unit are added to this, the result is a catalyzer driving investors away from the local housing market.
Published by Globes [online], Israel Business News - www.globes-online.com - on April 3, 2017
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