The Bank of Israel's second quarter inflation report seems to warn quite clearly of a bubble forming in real estate prices.
The report says, "Apartment prices (which are not included in the CPI) have continued to rise since the beginning of the year by more than the rate derived from the housing market fundamentals." The bank's economists point to the Bank of Israel's annual report, issued in May, which said that while there wasn't a bubble in 2009, if home prices continue to rise in 2010, they will pull away from a level which is in line with market fundamentals.
The Bank of Israel explained in its annual report that a bubble is created at the moment that prices rise on the basis of expectations of home price rises beyond the rise derived from market fundamentals, such as supply and demand, interest rates, and home service costs.
In the second quarter inflation report which was released today, the Bank of Israel explained that "The owner-occupied housing price index has continued to rise since the beginning of the year, and to April rose by 4.3%. The rate of increase in housing prices continues to exceed that in rental prices as well as the rate of price increase derived from economic fundamentals."
In the introduction to the report, Governor of the Bank of Israel Prof. Stanley Fischer wrote that "The fiscal debt crisis in several countries, mainly in south Europe, became more severe in the second quarter, leading to a significant rise in the level of uncertainty in the financial markets around the world, including Israel’s.
"This was most notable at the beginning of the second quarter, until the EU and the IMF announced the availability of funds to assist countries in financial difficulties in the euro zone, and until these countries started to tighten fiscal policies to deal with the crisis. These halted the decline in the financial markets, but the level of uncertainty remained high."
Published by Globes [online], Israel business news - www.globes-online.com - on August 3, 2010
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