Limited supply and growing demand, an interest rate rise and doubt over the effectiveness of the "buyer price" program in raising supply - all these factors indicate that home prices in Israel will continue to rise in the coming years, according to a survey of the Israeli residential real estate market by rating agency S&P, reported by "Globes" for the first time.
Nevertheless, the survey finds that the expected rise in prices is slower by some 50% in comparison with recent years. According to the survey, although the Israeli economy weakened slightly in 2015, activity in the housing market remained strong.
In the summer of this year, the annual rate of increase in housing prices accelerated to 6.5%, compared with 4% at the beginning of the year. Sales of new homes in the twelve months to the end of October were 35% higher than in the previous twelve months, totaling more than thirty thousand units. There was a 12% rise in the number of residential building permits in private developments in the first nine months, and some forty-six thousand homes were completed in the twelve months to September. This dynamism, the survey says, kept prices high on the market, and even pushed them higher.
The compilers of the survey, Jean-Michel Six (managing director and chief economist, EMEA Standard & Poor's) and Sophie Tahiri see economic growth in Israel rising to 3.1% in 2016.
"Based on current data flow, we estimate that nominal house price growth will range between 5% and 6% in 2015, from 7.8% in 2014," said Tahiri, "We think house prices will continue to rise over the next two years, although at lower rates of 3.5% in 2016 and 2.5% in 2017, as we expect mortgage rates will increase."
The report estimates that the Bank of Israel may raise its main policy rate toward the end of 2016 in response to accelerating economic growth, and as inflation is likely to return within the central bank's target range of 1-3%. "We also expect upward pressures on the shekel will lessen as the US Federal Reserve has started hiking interest rates in December this year. However, we think that the current shortage of supply will likely offset to some extent the effects of mortgage interest rate rises on house prices," the report says.
"Israel's supply elasticity to prices is lower than other advanced economies, according to the OECD. And household formation has tended to surpass the supply of homes. Although we expect 50,000 dwellings per year will be built this year and next, this will unlikely be sufficient to make up for the deficit in supply that has built up over the past decade.
"Government policies to alleviate supply constraints and lower upfront costs for home buyers are nevertheless creating uncertainties in the housing market. It remains to be seen whether the government's new Buyer's Price program will be successful, as the government has not yet established a track record of housing market policies that have improved affordability."
"Overall, we see upside risks to Israel's housing market related to a delayed normalization of the Bank of Israel's monetary policy against a backdrop of a stronger currency and still low inflation, leading the central bank to start to hike its main policy rate only in 2017," said Tahiri, "However, we think price rises could cool if the various government programs prove to be successful in easing supply constraints."
Published by Globes [online], Israel business news - www.globes-online.com - on December 28, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015