Then the Housing Market Came Tumbling Down

Israeli society and divisiveness go hand in hand. Arab-Jew, Ashkenazi-Sephardi, Sabra-Oleh, Tel-Aviv – civilized. However, for those of us who live here, one divide painfully stands out; owner-renter. Real estate is a great investment, but is increasingly difficult to attain. However, a study by Dr. Noam Gruber suggests that the housing market is ready to come tumbling down. Rejoice and read on all you renters (owners welcome too)! 

For a long time, the supply of new houses has not kept up with demand leading to a massive increase in housing and rental prices. A lack of available land and delays in getting permits have made keeping up with supply difficult. In addition, older Israelis with more capital at hand are buying multiple apartments making it difficult for younger Israelis to compete. It seems that when they’re not at the shuk forming human walls around the one stand that you need to get to, they’re buying aparments.

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Government policies to address the housing crisis have tended to focus on making it easier for first time home buyers to buy. The approaches have ranged from interesting at best to confusing at worst. Lets make it clear that the stance of Kalpi is that all Finance Ministers should graduate high school.

Gruber points to a major flaw in focusing on first time buyers (besides for it not increasing supply). It turns out that for every level of income, renters are more likely to own an investment property (one they don’t live in) than those who live in an owned home. These renters are likely getting help from their parents who may already own an apartment or two.

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There is a silver lining in the cloud of high prices though. In 2013, contractors began to catch up to natural growth in purchase demand. As rental prices come down, demand to buy investment apartments will come down even while supply continues to rise. As long as contractors can keep up the pace, we may be looking at a crash in housing prices that many seem to think is impossible in this country. Of course, this silver lining is only for those of us who don’t own apartments. For those who do, feel free to transfer ownership to the Avi Bieler Wants a House Fund. I prefer a yard.

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Gruber does note that as long as interest rates remain low (think of interest rates as the price of taking a loan), easy access to loans will help to prop up the demand for new apartments, something that could help prevent a sudden crash.

Currently the site holding the paper is down, but you can check out the Shoresh Institute press release here.

4 thoughts on “Then the Housing Market Came Tumbling Down”

  1. Two things you don’t talk about. 1) Foreigners buying either for twice a year use (and stays empty the rest if the year therefore increasing rental prices) 2) the fact that builders are going bankrupt (sahar Malibu and soon AfricaIsrael). This will kill many projects therefore decreasing supply and increase prices in the future.

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    1. Thanks for your comment!
      1)I remember reading somewhere that foreign owned apartments actually make up a far smaller part of the market than people think. I just now looked for a while for the article and couldn’t find it. It was about 2 years ago. Let me know if you have exact numbers. That said, foreign owners frequently own more expensive apartments that aren’t in the range for us normals. Its interesting to think about the possibility of things such as the Jerusalem double arnona law making foreign owners look to lower priced apartments though… 2) Builders going bankrupt is definitely an interesting issue, but it doesn’t seem to have effected completed apartments yet. There are enough contractors to pick up projects. What could happen is a collapse in the construction industry which would be bad, but maybe we could move them to building infrastructure projects? I don’t know enough about the industry to know if they are flexible in that way.

      Thanks for reading and please share if you liked the post.

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  2. I am a real estate professional, and while my experience is limited to the Jerusalem area, I have many colleagues who tell the same story as myself: demand still far outpaces supply, *especially* in the central areas of the country (what’s known colloquially as Hadera-Gedera). I am not 100% sure, but I believe Gruber’s data is all-inclusive. This does not therefore account for the fact that demand is skewed towards these areas, in which case this just might serve to create an even greater price discrepancy.
    First of all, as alluded to above, housing construction starts does not mean anything until these units are available. There are and have been many projects which have stalled due to a plethora of problems, mainly finance-related.
    Second, the housing market has for several years been rising at a rate which prices many families out of the market. This means that there is a substantial amount of *suppressed demand* in the market, meaning that if indeed prices do fall (which I seriously doubt, at least in the short run), they are sure to spike right back up again as soon as all those individuals are “priced back in”.
    Third, the article mentions rent prices coming down; the government’s actions (mainly through tax measures) in attempting to force investors out of the market (e.g. the 8% purchase tax and the new proposed tax on owners of three or more apartments) will surely diminish the supply of rental apartments.
    [On a side note, we may be witnessing the stupidest finance minister of all time; he has tried almost every (dumb) trick in the book except actually pave the way to more construction]

    I have my serious doubts, and the market sentiment is the same right now.

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    1. Thanks for reading!
      Gruber does address some of your points. I suggest you read the press release (and then the article when they finally fix their website). I try to condense the posts so they are more accessible and then throw the links in if people want to go down the rabbit hole. Below are two paragraphs from the press release. As for the necessity of completions, you are obviously right. That said, we have seen a major increase in the number of completions through those problems (such as contractors going bankrupt)

      1)Such a housing surplus would manifest itself differently in different parts of the
      country. In certain areas, the surplus could appear earlier and/or be greater than in
      others. In some places, investors could cope with a shortage of long-term tenants by
      converting their properties into short-term vacation rentals. In Dr. Gruber’s view,
      governmental involvement, as exemplified in blanket agreements (heskemei gag),
      may distort market mechanisms and create extensive supply in low-demand areas.
      Nevertheless, housing price trends in Israel’s districts are closely correlated. This
      phenomenon points to great interchangeability between districts and indicates that
      declining prices in one area can have a strong impact on prices in nearby areas

      2) To monitor this process, the Shoresh
      Institution study also looked at pentup
      demand for apartments, which
      can be approximately measured in
      terms of the percentage of multiplefamily
      households – i.e., households
      comprising two or more families (for
      example, when a married couple
      lives with the parents of one of the
      spouses). Dr. Gruber shows that during the years 2003-2008, when housing prices
      fell in real terms overall, pent-up demand also declined. In other words, fewer and
      fewer married couples chose to share a household with another family when the
      alternative – living in a household of their own – was relatively inexpensive. In 2004
      multiple-family households accounted for 2.5% of all households; by 2008 that figure
      had declined to 1.9%. When prices in the housing purchase and rental markets rose,
      more and more families chose to share homes with other families. As shown by
      Shoresh Institution policy research, the percentage of multiple-family households
      increased to 2.6% in 2011, the highest figure recorded for the period covered by the
      study. According to Dr. Gruber, “it is interesting to see that, despite the continued
      rise in prices, the trend started to reverse itself in 2012 and the percentage of
      multiple-family households declined,
      reaching 2.1% in 2014.”

      As for the Finance Minister, I hope that one day it becomes more normal for their to be professional appointments and not political appointments for the most important ministries. Until that happens, populist parties will make populist decisions. Some will work and some won’t.

      Thanks for your comment and please share if you liked the post!

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