Israel property market may lose top ranking on borrowing costs

TEL AVIV: Israel, the best-performing residential property market this year, may lose its standing after becoming one of the first countries to raise interest rates since the global recession began.

“A bubble began to emerge this year, fuelled by the Bank of Israel,” said Shlomo Maoz, chief economist at Excellence Investments Ltd in Tel Aviv. “The bank is now beginning to raise rates again to fight inflation.”

The higher borrowing costs will dampen demand for mortgages, leading to a drop in property prices by the middle of next year, Maoz said in an interview. He was one of two economists in a Bloomberg survey of 10 to correctly forecast an increase in the key interest rate to 0.75% in August.

Israel, located in one of the world’s most volatile regions, has defied the worldwide housing slump because of a dearth of land available for development and tax breaks for investors. Prices rose 12.5% in 2Q from a year earlier, double the increase for Switzerland, the second-best performer among countries tracked by London-based property broker Knight Frank LLP.

Hagit Cohen, a stay-at-home mom from Hashmonaim, a small town between Tel Aviv and Jerusalem, was able to buy a second home in the city of Dimona in February because of the country’s lowest-ever borrowing costs.

Cohen, 47, paid the equivalent of US$150,000 (RM508,876) for the 2-bedroom property by taking out a 3% mortgage. She will receive annual rental income of about US$12,000, or 8% of the purchase price.

“It was a no-brainer,” she said. “I was getting no return on my money in the bank.”

Mortgage rates are about 2%, according to Mortgage Israel, the country’s largest home-loan brokerage. The average rate for the past five years was about 5%.

The government controls 95% of Israel’s land and has consistently restricted the amount available for developments, according to Danny Ben Shahar, an economics and finance professor at Technion Israel Institute of Technology in Haifa.

The restrictions on land purchases contributed to a reduction in the number of apartments on the market to 7,779 at the end of July, the lowest in at least four years, the Central Bureau of Statistics estimates. That was down from 10,325 a year earlier.

New legislation passed by parliament may cause the pace of construction to accelerate, pushing down property prices, Housing Minister Ariel Atias said on Oct 8. The Israeli parliament on Aug 3 approved a law proposed by Prime Minister Benjamin Netanyahu to free up publicly owned land for private development and make it easier and cheaper to buy and build homes.

Property values may also begin to drop because homes are becoming unaffordable for many would-be buyers. The homebuyer affordability index dropped to 147 in August, the lowest in a year, according to research by Bank Hapoalim Ltd, Israel’s second-largest lender.

When prices go up, the index tends to fall because mortgages become more expensive.

In all, 7,523 houses and apartments were bought by private individuals in 1H, an increase of 15% from the same period a year earlier, according to the Central Bureau of Statistics. If the same number of transactions are completed in 2H, the total for 2009 would be the highest in at least five years.

The property boom contributed to an inflation rate of 2.8% in September, within the Bank of Israel’s target. Inflation may slow to 2.3% in the next 12 months, according to a survey published by the central bank on Oct 19. Even so, interest rates will probably rise to 2% to 2.5% during that time, Harel Finance Ltd said last month.

“Mortgages will suddenly become a major burden on people,” said Ori Greenfeld, an economist at Psagot Investment House Ltd in Tel Aviv. “We foresee a decline in property prices in 2010 or at least a fall in the pace of growth of house purchases.”

Apartment prices will fall in the “long term” as a result of higher borrowing costs, the Bank of Israel said on Oct 7.

The average price for a 4- to 5-bedroom apartment in Tel Aviv was 2.4 million shekels (RM2.21 million) in 2Q, according to the Central Bureau of Statistics. That’s about 12% more than three years ago.

In the whole of Israel, the average price of homes of this size gained 9% during that time to 1.3 million shekels, the statistics bureau estimates.

Israel never experienced a credit boom similar to the US or the UK, so the country is unlikely to experience a real-estate slump, according to some economists. Prices will probably “stabilise” rather than plunge as the central bank raises rates, Ayelet Nir, chief economist at IBI Ltd in Tel Aviv, said by telephone.

“Though mortgages became cheap, credit was never widely available in Israel,” Nir said.

Homebuyers must put down at least 15% of the total price and typically pay 30%, according to Aaron Morgan, head of the mortgage-research department at Mortgage Israel in Jerusalem.

Some neighborhoods in Jerusalem, Tel Aviv and the coastal city of Netanya are also shielded from a collapse by constant demand from Jews from the US, France and the UK, said Bernard Raskin, regional director of Re/Max Israel, the country’s largest property broker. Jews anywhere in the world who immigrate there under the country’s Law of Return are entitled to citizenship.

Groups of private investors in Tel Aviv, the country’s main financial centre, have replaced contractors and real-estate companies as the biggest purchasers of land in Israel this year, according to the Israel Land Administration. The companies are given tax breaks by the government that allow them to pay more, inflating property prices, said Maoz of Excellence Investments.

“When tax breaks begin fuelling price premiums for land, then that should be a clear sign that a real-estate frenzy has taken over,” Maoz said. – Bloomberg LP