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Less money chasing even fewer units…

How the Supply of New Units Dropped Further than the Demand for New Units.

Persistent inflation and rising interest rates have so far had little impact on the Israel real estate market, with property prices continuing to rise into the end of the year. The resilience of the real estate market mainly stems from the limited supply. While the number of vacant rental apartments is falling at an even faster pace, the supply of residential property remains scarce.

Despite the recent 24 percent drop in the number of home purchase transactions, the housing price index published last week was particularly grim demonstrating another sharp increase in prices, by 2 percent, during May and June, which brought the annual rate of increase to 17.8 percent—the highest in the past decade.

On November 21st, the Bank of Israel hiked the rates. This is the sixth interest rate hike made by the Bank of Israel since April, when it raised the rate from its historical low of 0.1%. But, unlike most of the advanced economies, the Bank of Israel Monetary Committee this time opted for a more moderate 0.5% rise, although some analysts had expected a 0.75% hike again. The BOI’s stated goal, is the reduction in the price inflation, a pre-requisite for thriving economy. That is the official “shpiel”. The BOI however is contending with another variable and that is the currency, and the potential nefarious consequences of an untenably strong shekel.

The question we are asking now , is whether those allegedly vital hikes have performed their intended purpose i.e. the taming of evil price inflation. Central Banks around the world in unison, jacked up interest rates as the necessary painful remedy on the path to post COVID recovery. Has it worked? And how did it affect the real estate prices in Israel and in Tel Aviv more particularly.

The short answer is : No, at least for the moment

A comparison of the transaction prices in the period August 2022 – September 2022 to the transaction prices during the summer months of July and August 2022, shows that dwelling prices increased by a whopping 1.1% on average.

Supply shortage is an the endemic disease crippling the property market in Israel. Raising interest rate, however, is only a monetary tool used by central bankers to increase the price of mortgages, tame demand thereby reducing prices. A few months into this monetary cycle, the obdurate problem is that not only, the demand still is stronger than supply but even aggravates as sellers, promoters and private privates alike, are pulling units off the market in line with the retreat in demand. The net result is less money chasing even fewer units…

A Market in Constant State of Penury

The graph below shows that since july 2022, the number of units whose construction has started but are not meant for sale has increased significantly relative to the number of units actually sold. The demand still exceed the supply by 33, 33%, a demand gap consistent over the last 10 years . I september, the demand drastically dropped from 12,600 units to 4,140 and was met with a supply of 2,700 units , a demand gap of over 35%.

At the end of September, approximately 48,590 apartments remain for sale, and the number of months of supply is 16.6 months.

Other Markets Experiencing Similar Difficulties

But for once, Israel is not an isolated case. Other economies of similar size and similar real estate characteristics actually experienced the opposite of the intended purpose of a monetary tightening. Credit Suisse reported that persistent inflation and rising interest rates have so far had little impact on the Swiss real estate market, with property prices continuing to rise into the end of the year. The resilience of the real estate market, they claim, mainly stems from the limited supply. While the number of vacant rental apartments is falling at an even faster pace, the supply of residential property remains scarce. Sounds oddly familiar ?…

The Credit Suisse report however goes on to explain how, in the future, as the baby boomers gradually pass away, a great number of owner-occupier units will come to the market and relieve the pressure, especially since the next cohort of homeowners, namely , today’s 30 somethings is much smaller than their baby-boom parents’. In Israel, that could not be further from the truth. With “indian style” demographic growth, the next generation of Israeli home-owners is much much larger than their preceding generation, as illustrated below.

So how high will prices go?

Well your guess is a good as mine. We are seeing seeing signs of sellers testing the waters, hoping the storm has passed. There is , however a stark difference between those promoters that actually own the land and those that have a deal with the existing apartment owners (TAMA 38). The risk profiles of these two types of promotions are at the opposite ends of the spectrum. Tama promoters do not face much financial risk until they actually start to build and usually by that time, they already pre-sold enough apartments to carry the investment costs.

On the other hand, the ones that undertook leveraged risk in order to buy the land (Israel Canada, Hagag, Mandarin and others) can not afford to wait and see until the interest rate tightening cycle is over. Besides, some of these projects have contractual delivery commitments with to their early buyers…

We think peripheral markets regions, particularly those that saw residential towers propping up frenetically (Netanya, Ashdod, some Jerusalem neighborhoods and ModI’in) , will experience a correction of 10 to 15%. On the flip side, the hyper prime Tel Aviv residential may actually see some more increases before it stabilises.

Published November 27, 2023