One day it will happen – and apartment prices will drop. It takes time, because it is not easy to realize that a train that has been running for so many years (220% from 2007 to the end of 2022) can change direction. But there is no economy without rising and falling waves. And yes, an apartment is also an economic product.
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when will it happen? Due to many indicators and numbers, it is difficult to put a finger on an exact date. Either way, January 15, 2023 – when the CBS reported a modest increase of only 0.3% in apartment prices and a 2.4% decrease in new apartment prices (excluding subsidized apartments) in November 2022 – will undoubtedly be considered a dramatic milestone. At first these will mainly Real declines – compared to inflation that stopped being zero, or in certain regions – but after that the trend will be horizontal and consistent.
The celebrations are coming
Buyers will no longer come in droves, either because they don’t want to (falling prices) or because they can’t (interest rates, slowdown), and the clichés about rigid housing demands will turn out to be irrelevant. In response, the snowball will be predictable: the contractors will flex and compromise in order to put new money into the coffers, which will allow them to repay expensive loans.
At the same time, second-hand sellers will line up and lower the asking price, what’s more, they quoted an absurd amount beforehand. The first to compromise will come from there – mainly Israelis who have already bought a new apartment and have not been able to get rid of their previous apartment (and the date of receiving the key and completing the payment is approaching), or Israelis who have lost their jobs and will have difficulty meeting their mortgage repayments (or both).
But then it will become clear that the expected celebrations – the air is finally coming out of the bubble and housing prices are falling – will not come. Even the smug politicians will not reap any fruits, when it turns out that the road to an apartment is no easier for the unhappy young couples, who will see less generous banks and an unoptimistic economic horizon.
Instead, we will get headlines about tens of thousands of workers being laid off at the construction sites, due to the drop in demand. According to the CBS, more than 213 thousand Israelis make a living from real estate and another 32 thousand from “real estate activities” – brokers, appraisers, etc. The livelihood of tens of thousands more depends on the real estate wheel – carpenters, electricians, painters and countless suppliers , and from there the path to other circles is short.
The change in the market will also startle hundreds of thousands, 1 out of every 10 Israelis, who bought and own an additional apartment for investment, certainly those who did so recently. Tens of thousands more young people who bought their first apartment to rent it out, many of them lottery winners for an apartment at a discount, will realize that maybe the celebration is over, while they are stuck with expensive rent in Gush Dan and paying an increasingly expensive mortgage for an empty apartment at the end of the world.
Hundreds of thousands of others will receive an update from their contractor that he will no longer carry out the TMA project or the evacuation-construction in their crumbling buildings. Yes, even if the construction permit has already arrived in sweat and tears. He will simply price his income at the time according to the new apartments that he will sell at the old prices, but at the prices and demands It will no longer be worthwhile to have them. “The municipality says that this is still a profitable multiplier? So buy from her,” he will say sarcastically.
Even the joy of the contractors who drove the prices up in the high tide years, those who offered illusory bids in land auctions under the assumption that apartment prices would rise further and further (and the financing cost would remain zero), will not really pay off – when it turned out that our pensions are also invested in the stocks and bonds of those entrepreneurs. Not directly, then, because the banks and insurance companies were the main engine fueling their appetite, and they too are suffering from the negative sentiment.
And finally, the public coffers will also be hurt when the income from real estate drops – about NIS 80 billion a year came to the coffers from the marketing and taxation of expensive land and apartments.
Will the momentum create a crisis?
On the sidelines, the declines in housing prices will surprise many people, who believed that there was no way it would happen here. But the elders of the market will remind them that this already happened not too long ago, between 1998 and 2007, when prices dropped by 25% in real terms. Only then, the negative momentum was also pushed by a global economic crisis (the explosion of the dot-com bubble) combined with a security crisis (the outbreak of the second intifada). Let’s pray that we don’t get one this time.
stars of the week
Excellent: the Chinese wheel moved 50 years ago, the change is coming now
This week we got a wonderful reminder of the long time it takes for a huge ship to change course – long after the rudder has been turned hard. In 2022, for the first time since the 1960s, the population in China shrank, and now there are 850,000 fewer people than in 2021, for a total of 1.412 billion.
All this is happening decades after China embarked on a determined struggle against population growth. At the end of the 60s of the last century, it launched a massive campaign to limit the birth rate, which only became in 1979, when China reached one billion inhabitants, a draconian law that limited each family to only one child.
And here, more than 43 years after that law, after more than 400 million residents have since been added to China’s population, and after in 2021 the authorities already allowed each family to have 3 children (and in 2015 permission was given to have 2 children), the graphs are changing direction.
For the attention of our politicians – who expect every decision to have results here and now.
Insufficient: Hedge funds have forgotten what it means to manage risk
In the investment world, the term “hedging” refers to investors’ plans for how to spread the risks in their investments. Borrowing from another world: if it is important to me that my team wins a fateful game, I will set my mood by betting specifically on the opposing team. If not victory, at least I will take solace in the money. Thus, to a share portfolio that is waiting for gains in the stock market, I will add a package of shares that were sold short, ‘shorts’, which will balance the yield in case the market moves in the other direction.
I was reminded of this in view of the published data on the dismal returns presented by the Israeli hedge funds in the past year. Once again the myth that they are more sophisticated in models of hedging and diversification of investments, which allows them to charge several times higher management and success fees, has been disproved.
The expensive funds that were supposed to hedge the risks, mainly took advantage of the aura around them to risk and fall with the whole market – and recorded an average negative return of more than 10%.