Inflation in Israel stands at 5.1% as of July, housing prices have risen by almost 18% in one year and there is no doubt that the difficulty of meeting expenses has increased significantly for most households in Israel. At the same time, there are those who “clip the coupon” from this whole situation, and have a lot of fun while many citizens struggle to meet their monthly expenses. Among those who profit in this period are the banks and the real estate companies. It is not uncommon to see voices of protest regarding the profits of the banks – whether it is in articles, investigations, real protests or posts on Facebook and the same applies to the high housing prices and the real estate companies. The thing that is less common in the public discourse is actually investing in those companies and banks and it seems that it is easier for the public and the media to complain than to deal with the situation and invest the money in those entities in order to enjoy their profits.
The problem in Israel is that there is no broad public discourse regarding investments in addition to a severe lack of financial education. It can be assumed that most Israeli citizens have heard of the stock market and maybe a little about investments, but it is more likely that they are more interested, knowledgeable and feel the price increases first hand. In addition to that, in the news we hear more than once how everyone is making money in our time everything is becoming more and more expensive. Without financial education this situation can be scary and frustrating – to realize that you are just a small screw in the system and you are doomed to pay more while the big companies and the bank cut you a coupon. There may be some truth in the matter, but that does not mean that every citizen does not have the option to help himself, and this is where the capital market comes into play.
With the help of the stock exchange, we can actually enjoy the celebration and join those who benefit from the price increases, and in a way, we can beat them. So it is true that the banks and real estate companies can carry with them a negative connotation for most citizens and it is often “difficult” to see them making a profit in our time, it is only more difficult to close the month, but is it better to live with hardship and anger or to understand that this is the state of things? The point is that the banks and real estate companies “They will benefit whether we invest in them or not, if so, isn’t it better to get a piece of the pie already?
Bank Leumi’s stock has only increased in the last 12 months by about 40%, the bank index itself has increased in the last 12 months by more than 30%, amazing returns, especially compared to the almost zero return on bank deposits until recently. In the case of real estate company shares, the story is a little different because there are different real estate companies that are affected in different ways by interest rate increases and inflation – yielding real estate companies in Israel, yielding real estate companies abroad, real estate development companies, etc. For example, the share of the construction company rose by 10% in the last year, while the share of Shikun and Binui fell by about 20%. Despite the differences between the companies, the Tel Aviv Real Estate Index still rose in the last 12 months by about 8%, and looking back two years we will understand the real story – despite all the declines in the last year in the index, in the last two years it has risen by more than 85%, in five years – over 110%.
Why are these companies earning so much and achieving such high returns while we are struggling so much?
As far as the real estate companies are concerned, the equation is very simple – housing prices are rising, there are not enough apartments, there is too much demand for apartments, the result is: handsome profits for the real estate companies, which are not expected to disappear. Although we may see a certain slowdown in profits in the next year or two due to interest rate increases, which are expected to moderate demand for a limited period of time, it is likely that in the long term we will continue to see these profits at least until there is an actual solution to the housing crisis, a solution that probably won’t be seen anytime soon even if Yes, it will take a long time for him to penetrate the housing market.
As far as the banks are concerned, interest rate increases are not a curse but rather a blessing. When the interest rate rises, the interest that the banks will charge citizens for loans, mainly the mortgages, also rises, which means that the return of the banks on the loans they give out rises and they earn significantly more money. What contributes even more to the celebration of the banks in this period is that the banks are not obligated to roll the interest rate increases into the public’s deposits, meaning the money we deposit with them – the same money with which they distribute loans and make handsome profits, accrues a very low yield for us unless the bank graciously agrees to try to compete in other banks and provide a higher yield, as Discount Bank did last month. Of course, we must not forget the commissions, for which the bank makes a profit no matter what happens in the economy. The interest income of Bank Leumi, Bank Hapoalim and Bank Discount stood at NIS 4 billion, 4.3 billion and 2.5 billion respectively only in the second quarter of 2022. The income from commissions in the same quarter at the three banks was an average of NIS 870 million.
How can you invest?
First, we can invest directly in the companies of our choice, whether in shares of specific real estate companies or in a certain bank. The investment can be made through the bank or through an investment house – each investor has different preferences regarding where he prefers and is comfortable to invest the money. Second, the way Which is simpler for the majority of citizens, who do not understand the capital market or companies and perhaps are a little afraid of it – diversifying the investment by investing in a mutual fund that follows the Tel Aviv Real Estate Index and/or the Bank Index. The Tel Aviv Real Estate Index consists of companies The largest real estate in the Israeli Stock Exchange and the Bank Index consists of the shares of the five largest banks, with each share occupying a portion of the index according to the size of its market value out of the total value of the index. Investing in these mutual funds will help us to passively invest in many companies with different functions (for better or for worse), and to enjoy the gains of each industry without the headache and risk involved in investing in individual companies.
How do we end up enjoying the profits?
First, you can let the effect of the de-interest rate work – let’s say we invested NIS 1000 and made a 10% return on our money per year, now we have NIS 1100. Assuming we make a 10% return on the money again, the return will be on the entire NIS 1100 and now instead of receiving 1200 NIS, in a situation where the return was only on the original 1000 (the fund), we will have 1210, this effect grows exponentially over time, therefore the more we More money and we let it “lay” longer, the amount of money we earn will increase more and more. This form of investment is suitable for those who are willing not to touch the money of their investment and expect to use most of the amount in the future, after letting the interest-de-interest effect “work” long enough.
The second way is to distribute money to ourselves – a dividend in fixed periods. Let’s say we decided to invest in a certain mutual fund and it generates a return for us during the year, we can sell part of our investment every fixed (or not fixed) period and actually realize the investment to “distribute” money to ourselves. Although the size of our holding will decrease each time we sell, we now have more money available, either to help us cope more with the wave of price increases or to buy more shares or another mutual fund. In addition, if we expect the investment to continue to rise, we can continue to do so for a long time. This approach will be more convenient for those who wish to provide themselves with a constant flow of cash based on the return on their investment.
The bottom line is that without investing at all, our money would simply be eroding in the bank at 5.1% per year instead of earning a real return. Whether we distributed a portion of the profits to ourselves or whether we chose to let the investment continue without taking profits, our situation has probably improved more compared to a situation where we would have left all the money on deposit in the bank or, God forbid, in checking account.
It is clear, then, that there are those who profit very handsomely, regardless of whether the citizens of Israel are satisfied or not. Maybe some of us have a preference to keep a clear conscience and not invest money in organizations that make money from us, but there is no doubt that we should all take a step back and think what is better – to be “right” while we complain and wait for a day to come and the politicians will really take care of the cost of living (which is unlikely to happen coming soon), or being “smart” – investing our money where the yield is and watching it grow instead of letting the cost of living defeat us.