According to Deputy Governor of the Bank of Israel Dr. Karnit Flug, the rise in home prices in Israel in recent years is not out of line with long-term trends. Speaking at the annual conference of The Israel Builders Association, Flug began her remarks by noting that home prices and rents had risen substantially in the past few years. "Looking at the long term, one sees that the rise in recent years came after a decade in which home prices fell in real terms, following the sharp rise in the 1990s because of the great wave of immigration, and prices are not very far from the trend line," she said.
The rise in prices over time is consistent with the long-term link between growth and home prices as observed in the OECD countries, Flug said, adding that the sharp rise in 2008 was a phenomenon common to those countries that did not experience a significant financial crisis at the time of the global crisis. "Since interest rates and returns on the markets have reached very low levels in recent years, in every country where the banking system was able to provide credit, this led to growing demand for housing, and with that a rise in prices. By contrast, in those countries in which the banking system was hit by a crisis, the low returns did not translate into credit to the housing market.
"If, at the end of the previous decade, the bottle-neck was at the planning stage, then, after the planning of more than 60,000 housing units was completed in 2012, it seems that the bottle-neck today is at the building permit stage, that is, with the local committees, among other things because of the constraint of the construction of infrastructure supporting residential neighborhoods," Flug said.
Flug defended the Bank of Israel's interest rate policy, which has been blamed for the rise in home prices. "The Bank of Israel's interest rate does have some effect on home prices, and the Bank of Israel takes this into account in setting interest rates," she said, "but the low interest rate supports economic activity, particularly exports, private consumption, and investment in industry. Higher rates of interest, when interest rates of central banks around the world are at a low, would strengthen the pressures for appreciation of the currency, and hurt exports. High interest rates would have prevented the growth we have had in recent years, and would have led to a higher rate of unemployment and a fall in the rate of construction of housing. In order to mitigate the effect of the Bank of Israel interest rate on the housing market, and particularly the financial risks involved in the rapid rise in mortgage lending, the Bank of Israel took a series of macro-stabilizing steps.
"In order to bring about a rise in construction and at the same time a fall in home prices, the supply of new homes needs to be expanded. To that end, the government must take steps to increase the amount of land available for construction, to shorten the time between the proposal stage and the start of actual construction, and to synchronize construction programs with infrastructure development. The government's task is to manage land and planning. Along with this, the government can restrain demand on the part of investors through taxation measures, as planned in the budget proposal," Flug concluded.
Published by Globes [online], Israel business news - www.globes-online.com - on May 23, 2013
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