The Bank of Israel will increase its intervention in the foreign currency market to prevent a further appreciation of the shekel, and Israel's housing market is not showing signs of overheating, says Merrill Lynch in a new review today. "Karnit Flug was appointed as the next governor of the Bank of Israel, and we expect her to maintain Fischer-style monetary policy. The Bank of Israel is expected to keep rates low and purchase foreign currency," says Merrill Lynch, "The housing market shows no signs of overheating."
Merrill Lynch does not expect another interest rate cut to below 1%, and believes that the Bank of Israel will continue its purchases of dollars and an expansionist monetary policy. "The shekel is now at its 2008 high, confirming why the Bank of Israel is so reluctant to see further appreciation and will likely step up in reserves accumulation. The appreciation trend might be contained next year if the Bank of Israel takes more aggressive steps, in our view." It adds that Nathan Sussman, whom Flug appointed to the Monetary Committee, supports her approach to monetary policy. Merrill Lynch does not believe that that the Bank of Israel will implement restrictive capital control measures to prevent the shekel's appreciation, such as were implemented by Brazil, Chile, Peru, Taiwan, South Korea, Turkey, and South Africa. However, it believes that the Bank of Israel will intervene in the foreign currency markets, because it estimates that each 1% appreciation of the shekel could lead to a 1.5-2.5% decrease in exports of goods, which account for 40% of Israel's GDP.
Merrill Lynch devotes a large and interesting part of its survey to Israel's real estate market, in view of the debate over the existence of a housing bubble. Merrill Lynch says unequivocally that Israel's has no housing bubble, and compares Israel with other countries. The tables show that housing prices in Israel have not risen as much as in other countries, and that Israel's mortgage market is safer than other mortgage markets.
"The housing market in Israel is not showing signs of overheating, in our view," says Merrill Lynch. "Although housing prices increased by almost 80% since 2007, a bigger picture view shows that housing prices in Israel have lagged peer countries since 2000. Israel had a late start and still trails some countries." The takeoff in Israeli housing prices began in 2007, whereas the takeoff in the countries in the graph began in the early 2000s. In addition, while housing prices rose by 180-250% in Australia, the UK, South Korea, and other countries, prices in Israel rose by 80%.