The question returns: rent or buy?

It's the cardinal question about Israeli real estate: buy or rent? In recent months, more and more people, especially those setting up home for the first time and young couples, feel that rising rentals coupled with easy mortgage terms have created a situation where monthly mortgage payments together the requisite equity have made buying an apartment more worthwhile. But is this really the case? It depends whom you ask and, no less importantly, where you make your inquiries.

Figures from the Central Bureau of Statistics and realtor chains reveal that apartment prices in high demand areas have risen by up to 20% over the last year and a half (with a few exceptions where they rose even more), a rise that has left many people now renting apartments bewildered. On the one hand, the rise makes their dream of buying an apartment ever more remote, while on the other hand, the steep rentals they're now paying are using up the savings that could have been used as a down-payment on their own homes.

The Realty Executives real estate brokerage chain and Bank Adanim - Mortgages and Loans Ltd. have compiled a "back-to-back" comparison for "Globes" of rentals and mortgage repayments for properties in several cities. According to Realty and Adanim, because of the steep rise in rentals in high demand areas, taking out a mortgage to buy an apartment has become a viable alternative for renters in a good many cities. The size of mortgage repayments are based on the apartment's price, and on the assumption that the buyers have equity equal to 30% of the value of the property, and that the mortgage is given for a 25-year period at a fixed interest rate of 5%. It transpires, on the basis of these assumptions, that in cities such as Netanya and Petah Tikva, purchasing an apartment is far more worthwhile than renting one, at least judging from the size of the monthly repayments there.

The monthly rental on a four-room apartment in Jabotinsky Street in Netanya will cost $1,200, while the monthly mortgage repayment on an apartment priced at $260,000 will total just $1,064. Other areas worth buying property in include Haifa, the market for small second hand properties in central Tel Aviv, and the general second hand property market in cities such as Ramat Gan and Givatayim.

On the other hand, there are considerable differences between rentals and sale prices of new apartments in Ramat Aviv, Ramat Hasharon, Holon, and Rishon LeZion West, because of a steady rise in both rentals and purchase prices. According to the authors of the survey, the worthwhileness of buying a property in these cities depends on having equity upward of 30%.

Realty Executives Israel general manager Yohanan As notes that most renters in high demand areas, especially Tel Aviv, are singles, young people, students, sharers, or young couples, people who are unable to raise equity - which rules them out. "As for the small number of renters who do have initial equity and are paying $1,300-1,800 a month in rent, they would obviously be wise to consider buying, even it means compromising slightly on location or size," he says.

As stresses that most renters in cities such as Givatayim, Ramat Hasharon, and Ramat Gan still find it hard to make the switch from renting to buying, especially where new properties are concerned. "There could be opportunities for them on the second hand market. These are cities where the gap between prices of new and second hand apartments is exceptionally wide, and second hand deals are booming," he notes.

As attributes the worthwhileness of buying property in Netanya and Petah Tikva to the fact that the rises in rentals in those cities were high relative to the rise in property prices over the last two years. This is due largely to the dwindling supply, and the movement of buyers and renters to cities in outlying regions. "Renters have found themselves with opportunities to buy, and monthly rentals and mortgage repayments are clearly very similar," he says.

In Haifa too, the gap between rents and mortgage repayments is small, making the buying of an apartment worthwhile. According to Mayor Yona Yahav, Haifa is now a city of real estate opportunities. "The demand for properties in the city is mirrored by the rise in rents, but nevertheless, property prices have not risen at the same rate. Proof of the potential here can be found in the entry to Haifa of Israel's largest builders, such as Bayside, Azorim, and Shikun Ovdim, which will build thousands of units here in the coming years," he says.

According to Adanim CEO Zvi Livne, the recent rise in rents has made buying a property a more attractive proposition than renting. "In many cities, renters with equity equal to 20-30% of the property's value can, with a bit of effort, convert rental payments into mortgage repayments," he says. "Even if that entails an extra 20% a month in the cost of the mortgage, the feeling is that it's worth making the effort. It's important to remember that these payments amount to an investment in ownership of the property, as opposed to payments that go directly to the landlord, where the tenant is actually left with nothing.

"Aside from this, one has to take into account other factors in favor of the option of buying a property, and which significantly reduce the gap between the alternatives, such as the cost of repeatedly moving from one rented apartment to another, and the sense of impermanence that nearly everyone who lives in rented accommodation feels. And that's even before we take into account the money people have to invest in every rented property they move into. Even if it's relatively small sum each time, it can eventually add up to a considerable amount," notes Livne.

Naturally, Livne avoids mentioning that were the owners' equity deposited at the bank rather than being spent on an apartment, it could produce other benefits worth considering.

A bachelor and homeowner

Livne says there is evidence of a new trend of single people buying apartments and then renting out rooms to cover the cost of the mortgage. "There has been a consistent increase in the percentage of single people interested in buying an apartment. The high rents in the central region coupled with a marked rise in the age at which people marry, has made young people realize that there's no point in waiting until their wedding day to own a property. Some single people, especially the younger ones, buy an apartment, and sublet a room or two, thereby covering a large part of their mortgage repayments."

Association of Contractors and Builders in Israel (ACBI) director general Yossi Gordon says the reason that people prefer to buy property is also related to the fact that there is no long-term rental accommodation in Israel. According to him, people more or less have an idea of how much their monthly repayments will be when taking a mortgage with a fixed interest rate. "If there were a long-term rental option in Israel, more people would rent," he adds.

In any event, buying property is by no means as financially worthwhile as was thought. Many financial experts argue that buying a property is not worthwhile, especially in Israel, where, as mentioned earlier, equity not invested in buying an apartment could unquestionably yield profits elsewhere.

Danny Fishman, co-president and CEO of investment house Tamir Fishman & Co pours cold water on anyone already searching for apartments in the property advertising columns. According to him, the committee set up by the Ministry of Housing and Amidar Ltd. in 1990 to examine the state of the low-grade housing market in Israel, on which he also served, already realized then, that "It has always paid to rent rather than buy an apartment in Israel. The trouble is that everyone is better off renting, but there isn't, nor has there ever been, a rental market in Israel."

Fishman stresses that the return on letting an apartment in Israel has always been lower than the return on even the most conservative of investment instruments, and that the decision to buy property has never been driven by the low rent return, but rather by the capital gain that buyers hope to make, should real estate prices rise.

An unconvincing argument

Fishman notes that the long-term return on a conservative stock portfolio in both the global capital market and in Israel is 10% (and at least 7% net), and 4-5% on debt instruments such as bonds, while anyone who prefers to put his money into real estate will get a nominal return of 2-3% at most, which means the net return, if any, will be negligible. "It's not worth the risk. Real estate can always crash, and there also times when a real estate asset is illiquid. You can have an apartment on the market for a year and it won't sell. You would expect an asset like this to give a higher return than that on debt instruments, but in Israel, apartments give a lower return than debt instruments."

Fishman stresses, in addition, that dividing the price of an apartment into 12 monthly rental payments in order to calculate the return is misleading, since there are other factors to consider such as, for example, tenant-landlord disputes, and property renovations.

Fishman feels that it is the psychological element which ultimately persuades an Israeli to buy an apartment. At any rate, he says, "If you rule out the haredi (ultra-orthodox) and non-Jewish populations, the ratio of rentals to ownership is similar to what it is elsewhere, given that people are now getting married when they're older and having fewer children. But in other countries you can rent for long periods whereas in Israel, families are looking for security and don't want to live in the fear of having to switch school every year or two just as they've put down roots."

Fishman stresses that the city, area, or apartment quality or size do not matter. "The return you get from renting out an apartment amounts to a loss. The sole consideration is the capital gain from a rise in the property's value, and not from the monthly return, which is obviously a loss. An individual apartment has an advantage to a certain degree in that it qualifies for a tax break every four years, and that is virtually the only instrument where I can sell a capital asset without being liable for tax, but that has nothing to do with the return," he says. "Moreover, anyone who already owns an apartment as an investment would be well advised to sell it and put the money into another instrument."

So why do Israelis persist in buying property as an investment? Fishman points out that when Israelis come to deal with matters relating to real estate, financial considerations are set aside, and psychology, peer pressure, and genetics are the factors that determine how they think. "At Tamir Fishman, our clients include wealthy, astute people who know perfectly well how their money is doing. When it comes to buying an apartment - despite what they know, and no matter how hard I try to dissuade them - everything is forgotten and they say 'the apartment is for my children' and hold on to one for them for 20 years. With the money they could have made elsewhere, even in debt instruments, they could buy two or three apartments. No matter which way you add it up, it's not worth buying an apartment, but I can never get people to see reason."

Buy or rent - in US dollars

Source: Realty Executives and Bank Adanim - Mortgages and Loans

Figures relate to four-room apartments, unless otherwise stated.

Mortgage repayments are based on equity of 30%.

In all instances mortgages are for 25 years and carry fixed interest of 5%.

Published by Globes [online], Israel business news - www.globes.co.il - on January 20, 2008

© Copyright of Globes Publisher Itonut (1983) Ltd. 2008