Despite the continuing rapid increase in home prices, the Shoresh Institution for Socioeconomic Research has found clear indications that Israel's housing market is nearing saturation.
According to a new research published by the institution, after years in which the number of new apartments built was lower than the growth in the number of families, since 2013, construction rates exceeded the natural growth in demand. Since the pent-up demand - as reflected in the share of multi-family households- has been low, in the near future investors buying apartments are expected to begin having problems finding tenants, leading to a decline in rent prices. This process will make the investment in housing to be less profitable, halt price hikes and even initiate a trend of declining prices.
The Shoresh Institution for Socioeconomic Research, headed by Prof. Dan Ben-David, is an independent and impartial policy research institute, which carries out fact-driven research on Israel's economy and civil society.
Many tenants own investment apartments
The research indicates that the number of renter households owning an investment apartment is significantly higher than households with similar income levels who live in their own property. This is indicative of a strong tendency of households to 'acquire a foothold' in the market by buying an investment apartment, and of the significant support they probably receive from their families, which makes these purchases possible. It is also likely that in some cases, such assistance actually constitutes a proxy investment by relatives who already own apartments.
Dr. Noam Gruber, author of this research, says, "It is hard to understand how the government's professional and political echelons are willing to forego billions of shekels in annual government revenue to fund investment activity, when that money could be used to solve the formidable systemic construction authorization problems, which would increase the supply of land approved for construction and lower its cost.”
Gruber adds, “The efficacy of governmental efforts to reduce investor purchases by raising the purchase tax is clearly limited in its effectiveness since governmental authorities are unable to identify investment purchases by or via renter households."
Rate of construction exceeds demographic demand
Since 2013, the rate of construction (number of new apartments) has significantly exceeded the growth in natural demand (number of families). If this situation continues, Shoresh claims that landlords will eventually find it difficult to find tenant dues to a surplus of rental apartments, which will lead to a drop in home and rent prices. Since the return on an investment in housing will drop, and even become negative, such a scenario could halt the trend of purchasing apartments for rent.
Interest raises may accelerate the crisis
After nine years of price hikes, the Israeli public may have succumbed to the false assumption that this is permanent trend and that home prices will never decline. "As can be seen from Israeli and world experience, this assumption is altogether unrealistic," Gruber explains. Such a scenario will lead to a severe crisis in the construction sector and reduce the value of the property of many investors.
Furthermore, the research claims that a housing surplus might manifest differently in different parts of Israel. In some areas, a surplus may develop earlier than in others. In some areas, investors could overcome the shortage in long-term renters by converting their apartments into short-term vacation rentals. Government involvement, such as blanket agreements, may distort market mechanisms and create extensive supply in low-demand areas. At the same time, home price trends in different parts of Israel have been closely correlated, indicating that declining prices in one area will have a strong impact on prices in nearby areas.
Interest rates also play an important role: a clear trend toward rising interest rates would precipitate, and possibly exacerbate, the possible market crash. By contrast, should interest rates stabilize at a low level, the decline in prices could potentially slacken or be delayed, enabling the construction sector to adjust gradually and avoid a crisis.
Published by Globes [online], Israel business news - www.globes-online.com - on November 7, 2016
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