The surge in the number of Israelis buying apartments for investment in the past decade is due to the levying of a capital gains tax in the capital market, the global crisis, which reduced the value of financial assets, and low interest rates, which made investing in real estate worthwhile, compared with the alternatives, says the Bank of Israel in a new report. In 2003-12, the share of households owning two or more homes increased from 3.2% to 7.9%.
In 2011-12 the relative likelihood that an investor, rather than another purchaser, purchased a home was about 90% of the probability before the adoption of tax and credit policy measures, similar to the average likelihood in 2003-07.
In examining the breakdown of home purchases for investment, the Bank of Israel says, "The share of purchases in Tel Aviv and Central districts out of total purchases by investors expanded greatly in the middle of the previous decade, and afterward in the periphery. A possible explanation for this is that the relative prices of homes in the center of the country increased greatly in the beginning of the period and accumulated capital gains, with a similar phenomenon taking place in the periphery in the rest of the period. Furthermore, yields on renting out homes declined throughout the country, although they remained relatively high in the north even during the second half of the last decade.
"Throughout the entire reviewed period, the share of investors’ purchases in the Tel Aviv district out of total purchases in the district (about 29%) was much higher than the shares in the rest of the country, apparently due to strong demand for residential rentals.
An econometric examination of the factors affecting the likelihood that an investor -rather than another purchaser - has purchased a given home, indicates that investors tend to purchase homes that are relatively small. The explanation is that the return on renting out smaller homes is relatively higher, and declined by a more moderate rate than the return on renting out a typical home. Investors have no preference regarding the age of the home, and they also do not prefer a first-hand home over a second-hand home. Investors have a strong tendency to purchase homes in the Haifa and Tel Aviv districts, a less-strong tendency to purchase in the periphery, and a relatively weak tendency to purchase in the central and Jerusalem districts. They tend to purchase homes in large Jewish communities.
"With regard to the socioeconomic background of the neighborhood in which the home is located, it was found that investors’ preference is similar to that of other purchasers. Given the characteristics of the home and the environment, investors purchase homes at prices similar to those paid by other players in the market, a finding which may show a competitive market."
As for the link between yields and investing in real estate, the Bank of Israel found, "The more the surplus yield from renting out an home - meaning the spread between the yield on renting out a home (by area and home size) and the yield on an alternative investment track such as the interest on CPI-indexed deposits for ten years or more - increases, the more the likelihood that an investor (rather than another purchaser) has purchased a given apartment will increase. Every increase of one percentage point in the surplus yield increases the probability by 22%. Short term interest rates also have an effect on investors’ behavior, and every 1 percentage point increase in the interest rate reduces the likelihood ratio by about 8%. It seems that investors respond more strongly than others to changes in the expected interest rate since they are more motivated by economic considerations. In the period following the coming into effect of the measures, the interest rate effect declined by a third."
Published by Globes [online], Israel business news - www.globes-online.com - on December 4, 2013
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