Rents will continue to rise over the coming year, but the boom is home prices is coming to an end, according to Bank Leumi (TASE: LUMI) chief economist Gil Bufman. He estimates that the real estate market is in the last year of the wave of rises that began in 2007, and that by the end of 2019 we will start to feel the change, which will develop into substantial price falls that will continued for several years, mainly in the periphery of the country.
There is also a message for Minister of Finance Moshe Kahlon: the Buyer Price program will cause a decline in the cost of housing, and its effects will be felt in Tel Aviv as well.
After four years of zero or negative inflation, will inflation return in 2018?
"We said a year ago that inflation in 2018 will be a little higher than in 2017, mainly because the shortage of rental properties will be felt more this year. Why more? Because in the wake of all the taxation measures and the talk of a tax on three or more homes, there was a substantial decline in the activity of people buying homes to let, which is the main source of supply of rental homes. Natural demand for homes in Israel grows at a rate of 50,000 households a year, half of whom turn to renting."
So rents will push the index upwards?
"Rent is part of the housing item in the Consumer Price Index; it's the main factor driving the index, amounting to about a quarter of it, and we expect it to rise by nearly 3% in 2018, so that we expect inflation of about 0.7% in 2018, with most of the other components of the index remaining generally unchanged.
"The exposure in "Globes" of the error in measuring rents by the Central Bureau of Statistics will also have an effect, since the Bureau has not fully covered the very sector in which there have been the strongest price rises. That too could push prices higher, to the extent that they improve the way they measure rents."
What next?
"In our longer-term forecasts, we see a fall in inflation in the next few years, for two main reasons. There is a great deal of housing under construction, and at some stage, in one year or in two years, this housing will start to reach the market and keys will start to be handed over, and there will be a considerable rise in supply."
Even in high demand areas?
"Even in high-demand areas there are housing developments in the pipeline, and there are many people who have bought apartments in the Buyer Price program who are currently renting in the high-demand areas, and as the Buyer Price apartments start to be handed over, apartments in the high-demand areas will become free. We therefore see the housing item pulling the CPI downwards in the coming years. It won't be in 2018, but in 2019, 2020, 2021, it will start to happen on the ground."
Published by Globes [online], Israel business news - www.globes-online.com - on March 8, 2018
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