Bank of Israel warns of real estate bubble

The central bank hints that it may introduce further macro-prudential measures to cool the market.

"Mortgage volume data indicated a return of buyers to the housing market, and this data in and of itself may create expectations of continued price increases. If these expectations are fulfilled, a price bubble may develop in the housing market," states the Bank of Israel in its latest review "Recent Economic Developments - May to August 2012".

For years, the Bank of Israel has avoided using the phrase "real estate bubble".

The Bank of Israel hints that, in view of the latest developments in the housing market, more macro-prudential measures may be used, saying, "It is thus vital to track developments in this market and to handle extraordinary developments as necessary."

It adds, however, "According to Bank of Israel estimates, home prices are in accord with the level of demand, supply, and interest rates in the market."

According to the Central Bureau of Statistics, home prices rose 1% over the past year, and rose by 65% between May 2007 and July 2012.

"The rapid increase in mortgages could be a one-time correction or due to long-term factors," says the Bank of Israel in the review. It says that if the surge in mortgages is a correction to the sharp drop in the number of transactions in recent months, or alternatively, if it is due to homebuyers bringing forward purchases because of the VAT hike in September, then the factors are temporary, and the jump "will probably not be permanent."

However, the Bank of Israel warns that it is possible that homebuyers believe that prices will not fall, due to the drop in housing starts, in which case the increase in mortgages "could be permanent, and is liable to result in a new rise in home prices."

The Bank of Israel presents a comparative multiyear study of other countries, including the US, Australia, Canada, and Ireland. It admits, "Home prices in Israel are at historically high levels", and that the average long-term home price is "high relative to other countries". In 2011, eight years of average gross salaries were needed to buy a home in Israel, compared with three years in the US, and five years in the UK.

However, the Bank of Israel shows that the difficulty in buying an apartment existed even before the current jump in prices, and is due to long-term factors, which need to be tackled differently through the institutions responsible for planning, construction, and the marketing of land.

Published by Globes [online], Israel business news - - on October 15, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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