Is there a real estate boom in Israel? Certainly headlines such as "Apartments snapped up in new housing project", "Rapid increases in housing prices" and "Is a real estate bubble developing" that have been appearing in the economic press in recent months seem to indicate a boom. And maybe a boom at this time is not surprising: real estate in Israel has been in the doldrums for more than a decade and a great deal of pent-up demand has accumulated – potential home purchasers are perhaps taking advantage of signs of recovery from the recent economic crisis to enter the real estate market at this time. Low mortgage rates and competition between the mortgage banks are definitely an incentive here.

But do the data show the boom? Let's start with prices. Housing prices are definitely on the upswing. During January-August 2009, the total Consumer Price Index increased by 3.7%, while the housing price component of the index jumped by 4.5%. An alternative housing price index, based on a survey of owned-home prices, shows an 8.5% increase in January-July 2009. Data on owned-home prices by region show that the price increases are happening in every region of the country. Pretty conclusive proof that something is happening to housing demand!

But what about direct data on demand – do they also show an increase? The answer is yes – at least until recently. The graph presents the volume of sales of new apartments by private sector construction companies. There was a steep increase in sales from March through June 2009: data on sales of new apartments by the public sector show a similar trend.

But then, sales of new apartments begin to decline in July-August – and quite steeply. A more comprehensive measure of home purchases, covering not only new apartments but also purchases in the secondary market shows that purchases in January-July 2009 were 6.3% lower than in the parallel period of 2008. Foreign investment in real estate, an important component of demand, declined sharply from mid-2008 to mid-2009 without any signs of significant recovery for the moment.

So what is going on? Is it possible that the increase in housing prices – which has definitely been taking place – is now having a dampening effect on demand? The reform of the Israel Lands Authority, recently introduced by Prime Minister Netanyahu aims, first and foremost, at freeing up land for building in order to lower the prices of homes. But the reform will take time to have any effect. The current weakness of the US dollar against the shekel may be a factor in explaining why there is still no upturn in foreign demand for Israeli real estate.

At the present time, the extent of the real estate boom is not clear, and if there have been some indications of increasing demand, it is not certain if we are looking at a temporary increase and not at a trend. No real estate bubble is evident either now or in the near future.       

It is however important for a return to long-term growth in the Israeli economy, that there be strong demand for real estate in Israel. After an extended period of lack of such strong demand, we apparently are still waiting for it to appear in a conclusive fashion.

Provided as an information service by I-Biz – Israel Business Information Services Ltd. For more information on I-Biz information services, visit www.i-biz.co.il or contact info@i-biz.co.il.

. .