Israel's Economy Helps Boost Real Estate Prices To Double-Digit Gains

Low interest rates, a shortage in housing supply and heightened activity by property acquisition groups, helped housing prices in Israel record their fourth consecutive quarter of double digit growth in the first quarter of 2010. While much of the increase was attributed to strong economic growth and low interest rates, the country’s central bank in recent months has taken action to raise interest rates and tighten loan to value standards in the hopes of avoiding a property bubble.

After a 22% y-o-y price surge in Q4 2009, the average dwelling price in Israel rose 16% y-o-y during the first quarter of 2010, according to data from the Central Bureau of Statistics. It was the fourth consecutive quarter of double-digit annual house price increases.

The average price of owner-occupied dwellings in nine main residential areas was NIS 958,000 (US$248,371) in Q1 2010, up by 2% from the previous quarter. Prices in Tel Aviv and Jerusalem remain the highest at NIS 1.7 million (US$450,750) and NIS 1.33 million (US$352,640), respectively. The average prices were up by around 4% to 5% q-o-q in these two main metropolitan areas.

On the other hand, the district of Haifa in northern Israel, which shares a border with Hezbollah-controlled districts in southern Lebanon, has one of the cheapest housing in the country, with an average price of ILS 647,800 (US$172,269) in Q1 2010.

The strong house price increases were attributed to strong economic growth and low interest rates despite the global crisis in 2009 and early-2010. Positive developments including OECD’s invitation last May to join the exclusive rich man’s club added to the optimism of buyers and investors.

Fearing that a house price bubble has formed, the Bank of Israel (BOI):

• Issued stricter mortgage lending rules in June 2010. The loan-to-value (LTV) ratio was reduced to 60% from 70%. Those banks wanting to give more than the allowed 60% LTV are required to set aside 0.75% of credit extended for doubtful loans.
• Raised the key interest rate by 25 basis points to 1.75% in August 2010

“Prices have risen over 20 percent in the past year and if they continue to rise at this pace we will have a bubble,” said BOI governor Stanley Fisher.

Aside from the central bank’s actions, the recent conflict involving humanitarian ships going to the disputed Gaza strip has also affected house prices. Historically, house prices in Israel are significantly affected by conflicts and the security situation in the region. Prices are also typically depressed by the huge amount of construction in new settlements.

Read the rest of this very good research paper from Global Property Online there.