Thomas White Global Investing
Israel Stamp
October 1, 2010
A Postcard from the Middle East
Israel: Real Estate Gains from Economic Surge

A ‘sold’ sign outside a house

The Consumer Price Index rose by 0.5% in August, with the housing component rising faster at 1.7% for the same month.

Bank of Israel Governor Stanley Fischer decided to ignore Finance Minister Yuval Steinitz’s plea when he raised interest rates by 0.25% to 2%, arguing that surging real estate prices may create a bubble. Perhaps, an encouraging second quarter annualized growth of 4.6% for the Israeli economy may also have factored in Fischer’s decision. But it was clear that concern about housing prices was uppermost when the Bank of Israel issued the verdict, ignoring Steinitz’s extraordinary desire to intervene. Regardless of the exchange between Fischer and Steinitz, one essential question remains: is real estate all that hot a property now in Israel?

If one were to judge merely by the numbers, yes. In the year from March 2009 to February 2010, housing prices in Israel surged by 22%. To put it another way, statistics from the Global Property Guide reveal that the country’s real estate market scored the sixth highest increase in residential property prices in the second quarter of 2010. Sixth highest in the world. Tel Aviv is hot. Jerusalem is hot. It is enough to raise the dreaded bubble word in Israeli economic circles once again, a concern we wrote of last year itself.

What is interesting is that the Israeli real estate sector has always been a bit of a laggard in the country’s economy. Over a period of almost 10 years from 1997 to 2007, Israeli housing prices rose just 19%. It has been the last two years, despite a global recession, which have surprised analysts. During this period, housing prices shot up by 27%. Of course, part of the rise must also have been fueled by an extraordinary global economic climate, which led central banks around the world to lower interest rates, making home loans cheaper and more affordable. Fischer did no different then.

It is against the backdrop of this market’s meteoric rise that Fischer was prompted to tighten lending provisions, despite the Bank of Israel’s recent reassurance that there was “no bubble in the housing market.” But this week’s review from the Bank carried a different tone. “House prices are still increasing steeply, and housing loans continue to expand rapidly reflecting the low rate of interest and the slow adjustment of the supply of houses,” the Bank noted. Fischer has also promised that the central bank would continue to ‘monitor’ the housing and real estate market in Israel, and take appropriate action where necessary.

Steinitz on the other hand, believes that the real estate market has stabilized – but real estate analysts point out that the recent lull could also have been precipitated by the Jewish holiday of Sukkot that falls in the month of September and October. Steinitz has other concerns too. Israel only recently became a member of the Organization of Economic Cooperation and Development (OECD). A rising shekel, which is one of the fallouts of a central bank rate hike, would hurt the country’s export industry, and drag a still recovering economy down. Inflation, though, is still within manageable limits despite these soaring real estate prices.

It is often intriguing when Banks decide to ignore government directives. The Bank of Japan recently bowed to Naoto Kan’s request. Here, Fischer appears to have shown where his priorities lie. There is a lot of life left in the Israeli real estate sector. And indeed in the Israeli economy. Just how well those two, and indeed Fischer and Steinitz get along, could well decide Israel’s next turn.

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