Israeli citizens have been paying the price for the Israeli governments’ failures in recent years. The rise in apartment prices was not “divine from heaven” but man-made, and in this case – omissions human hands It could have been prevented, even simply, but they didn’t.
Apartment prices in Israel have increased since the end of 2008 by 160% on average, of course. It seems that large sections of the public believe that what has been will be, and every month that passes with prices continuing to rise, convinces them even more that this will indeed be the case. In just the last year, apartment prices have risen by about 20%, and this is a “kosher certificate” for the fans of investing in an apartment.
They and this concept of theirs have quite a few reasons and justifications:
The demographic consideration: Israel has a young population with a high birth rate, with a high divorce rate, with immigration to Israel and also with affluent Jews abroad who buy apartments here in Israel “for whatever trouble may come”. All of this creates high demand.
Israel is a small country, it does not have enough vacant land for construction, and in general they do not build enoughthe demand is greater than the supply and the inevitable result is an increase in prices.
And the “fact” isthat apartment prices in Israel have never decreased. At most they stood still“.
If all this is not enough for you to be convinced, then the unreasonable prolongation of the process of building an apartment from start to finish – the completion of construction, Increases construction coststhe raw materials and the wages of the workers, and also you financing costsand hence – an increase in the prices of the finished product – the apartment.
If you want to specialize in the capital market and you have a big head and motivation, you can be a good fit for us.
The job can be part-time; flexibility in working hours; Work from home too.
Preference (not mandatory) for writing experience and basic familiarity with the capital market.
Leave details and we will get back to you
Thank you for leaving details, we will try to get back to you as soon as possible
The second and third arguments are very easy to refute, but that is not what we will deal with this time. We will deal with the statement that it is very reasonable to expect apartment prices to start falling within a few months.
1. Demand versus supply
In the last two or three years, and in particular in the current year when construction starts are coming for about 72,000 apartments, the number of construction starts exceeds the “hard” demand for apartments which is estimated at about 50,000 apartments per year. The number of apartments that are in various stages of construction is currently about 170,000 (and some of them have of course been sold). The apartments that will be built next year will be added to this inventory, which should also be a strong year for construction starts. All of this will put downward pressure on apartment prices.
And regarding the claim that, if all of this is true, then how is it that apartment prices have increased by 20% in the last year? from a demand of psychological origin – Fear of the continuation of the run in apartment prices at such a level that it will not allow the purchase of an apartment for a son or daughter in a few years, and hence – Advance purchase. All this is about to change now, and it has practical solutions too.
2. The interest rate and the plight of the contractors
Against the background of the interest rate hikes that have not yet been completed, which are also joined by the increase in the cost of construction inputs, contracting companies will be forced to advance the sale of the apartments in order to improve the cash flow theirs. Some of them still haveairbags” In the form of profits and cash of the years of abundance, but they are a different part Leveraged companies that need to refinance their debts through the issuance of new bonds, except that this time they will have to pay a much higher interest than the interest they paid for the previous raising of their old bonds.
The truth can be said, that although the statistics still indicate an increase in apartment prices, the process has already started. Some contractors try to hide the stress they are under by using Providing discounts other than through a price reduction but through other benefits such as providing an upgraded kitchen. This is a well-known phenomenon that is always a preliminary step that comes before a direct price reduction.
3. The plight of the housing developers
The current situation is problematic and challenging not only for some of the construction companies, but also for some, in my estimation, not a small part, of the housing developers. They purchased a new apartment, committed to a series of payments and have not yet sold the apartment in which they currently live. They actually are “Occupy” two apartments at the same time. They acted that way because who appreciated that time works in their favorand they will be able to sell their apartment at a price that will go up and down. As soon as it becomes clear to them that the prices have stopped going up, and God forbid have started to go down, they will put these apartments up for sale and there will be great pressure to lower prices.
4. The challenge of the buyers of investment apartments
The interest rate hikes that have been up to now, and those that are still on the way, are not only the problem of the companies that build apartments and the housing improvers, but also of those who intended to purchase an apartment for investment in order to rent it out and enjoy the rent and the expected increase in their opinion from the increase in its value.
A simple calculation shows that what was true ten years ago is not true today. Back then, the interest rate on mortgages was much lower than today and the return on renting the property reached about 4% per year. Today, the interest on financing the purchase of the property is, as mentioned, higher, while the yield on renting the property is lower and stands at half: about 2% (the reason: apartment prices have risen much more than the increase in rent), moreover, The purchase tax which has been raised since then (and stands at the highest level of 10%) will “eat” the yield of at least 3 years of rent. If that’s not enough, buying an investment apartment at current prices is done after a dizzying price increase, which requires both a mortgage in much larger amounts than before and a strong belief that prices will continue to rise.
We will also mention that a few years ago, the apartment buyers did not have a solid investment alternative for their money, since the interest on bank deposits was zero and the Israeli government bonds provided a very low yield, whereas today, They can get about 3% per year on their money, which is more than they would get as rent without all the headaches associated with renting the apartment.
Where do they have another alternative? abroad. There they can buy 3 apartments for the price of one apartment here and enjoy themselves Cumulative return is several times higher.
5. The challenge of young couples as first home buyers
There are young couples who have no chance of purchasing an apartment They have no minimum equity which allows them to take out a mortgage and if they don’t have rich parents. Their only chance, if any, is to purchase an apartment in the far outskirts, and then they face the problem of employment.
For young couples who have some equity, there is an option to take out a mortgage, but here is the sting!
Taking out a mortgage of the current scope, which is about NIS 1 million on average at the current and future interest rates, will mean that they will have to spend about 35% to 40% of their net salary just for this purpose, and this dangerous level Don’t allow them other essential expenses at a reasonable level, such as raising their children, education, food, health and much more. Furthermore, they take on a long-term commitment when there is no assurance that one or both of them who are working today, will not find themselves unemployed without the ability to earn, and then the apartment they purchased will be in danger.
Already today, according to a survey by the Bank of Israel, the percentage of mortgages that are taken when the monthly repayment exceeds 30% of the disposable income (the reasonable limit), and are defined as dangerous, reaches 45%! Moreover: Banks show increased caution towards borrowers and an increasing number of them are refused and cannot get a mortgage, at least not in the amounts they need.
So ask, what is the solution for them? tough question. The “easy” answer is – send him with his parents. The real answer over time lies in one of two things: either the apartment prices will drop to a much more “sane” level, or they will finally build hundreds of thousands of apartments here for very long-term rent under better conditions than the market conditions and incentivize the contractors to do so.
6. The connections and interfaces between the real estate markets in Israel and the real estate markets in the world, and between the real estate markets in Israel and the stock markets: The small Israeli economy is part of the larger world economy and is affected by it whether it is inflation, interest rates, or growth or slowdown. Ofen, real estate in Israel, which occupies an important part of the economy, is affected by the global real estate market.
This is in a clear slowdown and at the beginning of the decline in housing prices after years of price increases. There is no reason why what is happening in the world should not reach us, even if in a more moderate way Considering the special characteristics of the housing market in Israel. Moreover, There is a whole network of connections and interfaces between the local real estate market and the stock market (and bonds) in Israel and around the world. It is not, as many believe, two markets with no connection between them. These are two markets that have not only connections between them but mutual influences. When the stock market and the bond markets go down, as happened this year, and when high-tech is in a kind of crisis and there are almost no exits, The sense of wealth is damaged, And this has an effect on the price level especially of luxury apartments and from there it seeps down. When the interest rate rises, it has a negative effect not only on the stocks and bonds, but also on the demand for apartments and on the supply in the immediate term. The declines in the government bond markets create a solid alternative for apartment buyers to invest in. Falling real estate prices abroad create a worthy alternative to buying an apartment in Israel, even if it is not suitable for everyone.
Here is an interesting fact. The stock market in Tel Aviv in its broad indices decreased this year by a very moderate rate of about 4% (TA index 125), but the construction stock price index decreased by no less than about 20%. Apparently, we would have expected that this index not only did not decrease that much Strong, but will rise, since apartment prices have risen in the last year, which should increase the profits of the companies that build them. So why, after all, have stock prices fallen and strongly? Because the market expects that their future profitability will be affected by a variety of reasons that we mentioned earlier, including the expectation of a drop in apartment prices, and not least, the difficulty of selling them, i.e., liquidity difficulties.
And here is an even more interesting fact. who purchased Apartment for investment At the beginning of 2005 with a million shekels, today, on average, of course, he has an apartment worth about 2.5 million shekels. If we add to that the rent he received over the course of 17 years, today he has another 1.5 million shekels in current values, and in total, Roughly calculated and generous, 4 a million shekels. On the other hand, those who invested in stocks in 2005 Demarya company that builds residences, NIS 1 million, he has today about 18 a million shekels!. The psychology of “4 walls” and the daily volatility of the stock market prevents many investors from making the right move.
And another interesting phenomenon for researchers of the human soul. Classical economics teaches us that when the price of a product increases, the buying public buys it less and switches to similar, cheaper products. but, The behavioral economy teaches us There are at least two exceptions: stocks and apartments. When stock prices rise steadily, the public piles on them until the wheel turns. The same thing happens with apartment prices and with even greater intensity, since here we are talking about the need for an immediate or future roof and the buying public fears that they will not have the opportunity to purchase an apartment in the future and is doing everything to guarantee them a roof today. what What the stock buyers forget, and what the apartment buyers at crazy prices forget, is that there are no investments without risk, and what goes up can also go down.
7. Expensive apartment prices in Israel
To purchase an “average” apartment in Israel in 2008, households needed about 95 months of work. The increase in apartment prices since then (alongside the increase in real wages which was a moderating factor) leads us to the fact that today 176 months of work are requiredaccording to a more developed and more accurate index than the index of the Central Bureau of Statistics (about 160 months of work), an index developed by a team headed by Tamir Ben Shahar.
The truth is, these hard data are even much, much harder and are misleading.
Please note, this is 15 years of work (176 months) of salary before any other expenditure – food, health, education, communication and what not. In terms of what remains as free savings that can be directed to the purchase of an apartment, this of course depends on the household’s salary, the job of one or two, and the level of wages. Anyway, that’s much more on average, of course. This is called in a simple word – slavery.
This is not just an economic problem. This is a social problem of the first order. This is a problem of extreme inequality between those who have, not necessarily their own money, but rich parents’ money, and those who have neither their own money, nor their rich father’s money. I do not want to imagine the social explosion that will be at the door of any government in the future – if the current situation continues.
Any government that wants prices to go down and return to sanity has all the means to do so. The solutions, both on the demand side and on the supply side, are known. All that is needed is a combination of desire and the ability to perform. And if there is no will, then social reality will force it on the government.