During a recent conference, Prof. Nathan Sussman, Director of the Bank of Israel’s Research Department lectured on a number of points. He discussed how in Israel the increase in housing market prices has resumed, while the rate of increase of rental prices has moderated. He explained the developments in the housing market as the combination of supply and demand factors. Prof. Sussman showed a diagram with equilibrium points in the residential housing market. The diagram indicated that, generally, between 2003 and 2008, there were changes in demand for housing, without significant changes in housing prices. In other words, we can say that there was no problem of supply—the supply of homes was perfectly elastic. Beginning in 2009, demand increased, but encountered supply limitations. In 2009 and 2010, most of the growth in transactions beyond the 2008 level was due to investors, while demographic factors affecting demand did not change. In 2011, the social protest apparently acted to reduce the volume of activity in the market, with both buyers and sellers sitting on the fence, which was reflected in both a decline in demand and a decline in supply. In 2012, demand returned to its 2010 levels, while supply was slightly lower than in 2010. As such, Prof. Sussman concluded, the developments in the housing market are not simple, and both demand factors—mainly that of investors—and supply factors came together to create the current situation in the housing market.

From the perspective of demand, Prof. Sussman explained that one of the factors affecting demand for investment properties is the decline in yields in conservative investment alternatives in Israel and abroad. A home is not just a place to live, but also an investment asset. The income from the investment is the rent received, and the yield is equivalent to rental receipts divided by the price of the asset. When the yields on alternative assets decline, investors stream toward the housing market, and the increase in home prices acts to equalize the yield on homes to the yield on bonds.

In recent years, long-term yields declined both in Israel and abroad, with the Bank of Israel’s monetary interest rate contributing only partially to this, since yields are determined mainly in the global markets and are also dependent on the policies of the major central banks. Prof. Sussman showed data illustrating the correlation between long-term yields and the yields on owning a home in Israel, and data showing that the phenomenon is not unique to Israel. Ami Mesika, Ron Hershco and other real estate investors agreed with this anaylsis.

In analyzing the supply side, Prof. Sussman also related to the issue of financing in the housing market, and showed data indicating that the balance of housing loans continues to increase. He presented estimates from a research study being conducted at the Bank of Israel showing that the leverage of those taking out mortgages compared to their income has increased from about 30 percent of household income at the beginning of the last decade to about 35 percent today. According to these estimates, the loan to value (LTV) ratio also increased, from about 35 percent to more than 50 percent. This development led to the most recent steps by the Supervisor of Banks, since an increase in leverage increases the risks in the bank’s loan portfolios. While the levels of risk in Israel have not reached those in other countries, it would not be prudent to wait without doing anything until the risk materializes, as happened abroad.

Prof. Sussman noted that mortgages also have an effect on the supply of homes, since they constitute a source of financing for construction activity. Total credit to the  industry continued to grow this year, although at a lower rate than in the past 2 years, and speakers from the housing sector who participated in the conference also noted that, in their view, the issue of financing for contractors does not currently constitute a problem at the systemic level. Prof. Sussman added that there is an inventory of about 20,000 unsold homes. In the supply context, Prof. Sussman also mentioned the trends regarding the labor force in the industry. The data he presented indicate that the number of those employed in the industry continues to grow, while in recent years, the main growth has been among Palestinian and foreign laborers. It is clear that the growth in the cheap labor force solves the problem of supply in the immediate term, but, Sussman added, it delays technological improvements and increased productivity in the sector to a certain extent. In any case, as such, the trends on both the financing side and the labor input side show expansion, and can at best partially explain the receding supply.


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