Following the recent raises in the basic interest rate in Israel and the new limitation on taking mortgagees, the Governor of Bank of Israel Professor Stanley Fischer called the CEOs of the commercial banks to discuss whether or not the banks are taking the necessary precautions and correctly measuring the risk in the real estate sector.
These steps were criticized in the news repeatedly by the commercial banks and people who intended to purchase apartments.
The ministry of finance is also taking steps in cooling the real estate market by trying to raise the housing supply: it already issued exemption on gains tax on real estate for investors, who hold second or third apartment, and wish to sell their houses during 2011 and 2012.
The ministry of finance is also looking into additional steps to curb the real estate market such as restricting purchasing housing for investment purposes for two years.
The main question to be asked: is there a real bubble in the current real estate market in Israel?
Most of the people in the financial industry quote the rising Israel inflation which is stem, in part due to the rising housing prices in recent years as seen in the chart below. The chart also includes the total new dwellings sold, which has risen by 6.2% during 2010, while the average apartment rose by 16.9%.
But this isn’t the only figure needed to consider, one should consider at the total number of apartments sold and check if there is a hike in sale as there is in prices.
The chart below shows these figures of the total apartments sold between 2009 and 2010.
In 2010 there was only a rise of 1.76% in sale compared to 2009, and a 15% drop in sale in first quarter of 2011 compared to fourth quarter of 2010.
These figures indicate that de facto there are fewer houses sold in 2011. The raising of the basic interest rate warded off many investors.
Of course there are other considerations such as the capital requirements of Banks, the percentage of leverage they allow clients when purchasing an apartments, etc. however as long as the banks don’t pass off their responsibility in handing and allowing mortgages to third parties as was the case in the US, and their capital requirements are sufficient, the risk shouldn’t be greater than it was before the hike in dwelling prices.
One of the reasons for the rise in dwelling prices despite in the drop in total apartments sold might be related to the type of houses sold. In particular, during 2010 the number of new houses sold rose by 3.82%, while second hand houses inclined by only 1.13% compared to 2009. If newer houses are priced higher than second hand prices, then this make sense that the average sold apartments will show an increase despite a decline in total houses sold.
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