Capital raising by high-tech companies in Israel, in the last quarter of 2022, dropped to NIS 2.2 billion and returned to the level it was at several years ago, before the unicorn phenomenon of 2019, which intensified in 2020 and in the first half of 2022, a period when private start-up companies raised by value Shares exceeding a billion dollars.
In the low interest rate environment that existed until three quarters ago, in the world and in Israel, the recruitment was rapid and so was the rapid inflation in the value of some of the unicorns in the world, some of which were purchased by regular public companies traded mainly in the USA. The unicorn or the value of those purchased and turned them from a unicorn to a pony.
The total capital raising of the Israeli high-tech companies sector, according to the Israeli research center IVC, began to deteriorate from the peak of NIS 8.24 billion in the last quarter of 2021, after rising to this peak almost constantly since the last quarter of 2019, before the corona virus, when NIS 2.2 billion were raised, as In the last quarter of 2022. The number of transactions in Israel of all high-tech companies was cut in the last quarter of 2022 to 121, compared to the record of 215 in the last quarter of 2021.
Let’s make a comparison between the high-tech capital raising and apartment prices. In 2019, capital raising by high-tech companies was NIS 7.7 billion, apartment prices in Israel increased for a year, in the 12 months from November to December 2019, by 3.4%. A year later, the recruitment of the high-tech companies had already increased to NIS 10.4 billion and apartment prices increased by 4%.
A year later, the confidence and appetite of the hi-techists increased: in 2021, the capital raising of the hi-tech increased to a huge amount of NIS 25.7 billion, the hi-tech money was poured heavily into the unfortunate housing market that did not prepare and could not prepare for it. Apartment prices in Tel Aviv and Gush Dan were pushed up and swept the whole market after them. Apartment prices for the year from November-December 2021 reflected a double-digit increase of 11.6%.
More money poured in in 2022 from the high-tech recruitments and the huge salary that went with it (and the fat bonuses): this year, the high-tech companies raised close to NIS 15 billion and apartment prices rose by another 16.9% (assuming there was no increase in prices in the last month of 2022, for which the figure has not yet been published ).
The celebration is over
No more. Hiring in the high-tech market is experiencing a continuous decline from one quarter to the next. Apartment prices in recent months have also been rising lazily. In the last months reported by the CBS, October-November, prices rose by only 0.3%, after an average monthly increase rate of 1.5% for the previous six months. In the new apartments, the rate in the last two reported months even reflected a decrease in the average monthly rate of 0.6%, after an average monthly increase of 2.3% per month for five consecutive months.
Those who are not interested in the statistics listed above can learn about the pressure of the contractors who advertise their wares in huge ads, in big headlines offering discounts and extras and improving conditions for buyers, all in order to hide the drop in actual prices. Those contractors of new construction who are stuck at the end of November with a record of 50,870 apartments for sale to anyone, a volume sufficient according to the rate of sales for 19 months of sales, more than enough.
A year earlier, the number of new apartments left for sale was 46,665. Please note, at the peak of demand for apartments – before the interest rate hikes and the drop in capital raising by high-tech companies, in April of last year, the number of apartments for sale was at a low of 43,927, which was only enough for 11 months of sales, according to original data from the CBS.
Another blow fell on apartment prices from the direction of the cost of capital. Exactly in February a year ago, there was an idyll in the Israeli and global economy: raising capital cheaply, raising through high-tech, raising money from the banking system – the world’s money and capital poured out like the water of the Mississippi, Nile and Tigris rivers together. Endless rivers of money have been poured out by governments and central banks to save the world from the clutches of the Corona. In February a year ago, the interest rate in the USA was 0.07%, that is close to zero, in Israel it was 0.1%. Really fun: taking out mortgages, bringing in money from high-tech and buying more and more properties whose prices are skyrocketing.
Then, on February 24, 2022, the “black swan” appeared in the form of Russia’s invasion of Ukraine, and since then everything has gone wrong: the prices of raw materials have risen and energy prices have soared. Inflation in the world has risen to a peak in decades. As a result, the central banks raised interest rates, in the US continuously until 4.56% today, in Israel up to 3.75% now.
The combination of an increase in the prices of raw materials for the construction industry and the increase in sea freight prices, together with the increase in the price of money and capital for investments, was and is fatal. Another month and another month passed with the hope that just around the corner things would calm down and the interest rate would stabilize, but in practice the interest rate in Israel – which follows closely and religiously the interest rate of the Fed in the USA – continues to climb non-stop like a stubborn caterpillar on a construction site.
Finally, “the token fell”, which means the market began to realize that the golden age in the housing market is over and the business bubble in the apartment market is behind us. According to the chief economist at the Ministry of Finance, last November, 7,800 apartments were purchased, including apartments at a discount through government programs, a crash of 57%, compared to November 2021.
This is the lowest level of apartment purchases in at least a decade. Investors act from profit motives of cost-benefit for a period of years ahead: cost is the price of capital and taking its mortgage, and the chance of profit is the benefit. Investors purchased only 1,300 apartments in November 2022, a dive of 80% compared to November 2021. The inventory of apartments in the hands of investors decreased by 400 apartments. The sales of the contractors, who hold a huge inventory of apartments, decreased by 56%, compared to November 2021, to only 2,900 apartments. Even sales within the framework of a price per tenant and the like decreased by 57% to 2,300 apartments.
Also in the secondary market, in second-hand apartments, 4,900 apartments were sold, a decrease of 58%, compared to November 2021, and a low since 2003. Yes, in words – year two thousand and three! The chief economist at the Treasury states in her report that the decrease in the number of transactions is particularly noticeable in the Tel Aviv and Central regions. remember? Where cheap money previously poured out of the high-tech industry in a seemingly endless stream.
The sales promotions of the contractors stuck with apartments resulted, according to the Treasury, in a weakness of second-hand apartments even higher than that of new apartments. Naturally those who go up fast go down fast, the number of transactions in the Tel Aviv area decreased by 66% compared to November 2021, a twenty year low! The number of transactions in Nazareth decreased by only 46%. The economist at the Ministry of Finance found that the more expensive the price of apartments, the greater the decrease in transactions. The Treasury clearly says that in luxury apartments the decrease in transactions is particularly high, in our language apartments “from the high-tech island”.
Debt meets bear
The capital price crisis has increased, the banks naturally do not want to increase the credit limit for contractors, the risk has simply increased. The bank debt of the real estate sector with the banks constitutes 15% of the total business credit. According to the Bank of Israel, the value of the bonds issued by the real estate companies reaches NIS 108 billion, a debt that must be serviced under less favorable conditions.
Shares of real estate companies worth NIS 152 billion are traded on the market. What are the contractors doing? They are increasing the sale of apartments “on paper”. The volume of sales on paper – that is, you pay good money for an apartment that at this stage is only sketched on paper – reached a peak of 72% of all sales, i.e. of all apartments sold by the contractors in the free market that is not directed by the government. This is an increase “on paper” of another 13%, compared to November 2021.
Now new thickets are emerging above the real estate market. The employment figures in the USA for the month of January were very strong, 517 thousand jobs were created, compared to expectations of only 187 thousand new jobs. The unemployment rate in the US fell to 3.4% in January, after 3.6% in December, a drop to a low level not seen since 1969, the year of Woodstock and the moon landing. Now more and more people are saying that it is quite possible that there will be two more interest rate hikes in the US by mid This year, perhaps to 5.25%-5.5%, which will lead the Bank of Israel to further interest rate increases, perhaps less than in the US, but the interest rate will rise in order to suppress inflation in Israel.
These interest rate increases will strengthen the damage to the housing market in Israel, and this is even before we have taken into account the renewal of the Russian attack in Ukraine in the coming months. remember? On the 24th of this month, in two weeks, will be the anniversary of the invasion. The intensification of the war could renew the round of increases in the prices of raw materials, including the oil that is so essential to economic activity in the world.
Please note, even before the new strikes, the Central Bureau of Statistics found that from August 2021 to November 2022 there is a monthly average decrease of 4.1% in the sale of new apartments. We are approaching the 14th of Adar, the holiday of Purim, and parents are already looking for costumes for children. In the costume market, there are reports of a huge supply of unicorn costumes for girls and boys. The unicorn for adults is out of fashion.