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Roni and Ifat Irani have bought a 1,200 square meter penthouse in Tel Aviv’s Shalom Meir Tower for NIS 145 million. The Iranis own Irani Corp. which owns the Factory 54 retail fashion chain. The Iranis have bought two appointments extending from the 32nd to 34th floors of the tower, according to the land registry. The deal was signed in two stages on August 15 and 22, and is recorded in the land registry as belonging to Roni and Ifat Irani. Sources close to the deal say that the property is a “unique penthouse from which the view of the sea cannot be blocked,” thus justifying the price.This is the third highest price ever paid for a home in Israel, with the previous two deals involving foreign residents. In 2020, the late Sheldon Adelson bought the former US Ambassador’s residence in Gale Tachelet Street in Herzliya Pituah for NIS 230 million, and nearby Russian-Israeli oligarch Roman Abramovich bought a house for NIS 226 million. 12 years ago Israeli businessman Teddy Sagi also bought a house in Gale Tachelet Street for NIS 145 million. Earlier today, Galit Ben Naim, a manager in the Ministry of Finance Chief Economist Division, who is responsible for the Chief Economist’s real estate surveys, hinted at the deal when she wrote, “Something that is difficult to explain, is a certain deal that was conducted in August and was one of the highest priced deals ever in the local real estate market, with even the price of NIS 120 million not high enough for it.” Ben Naim added that it was in the city that featured last week in a report by UBS as having a high housing bubble risk – Tel Aviv.” The 129-meter high Shalom Meir Tower, which was completed in 1965, was at the time the tallest building in Israel. It was built on Herzl Street on the former site of the Herzliya Gymnasia high school, which was demolished. A spokesperson for Irani Corp. said, “We do not comment on the private matters of the family.”

Do Mortgage Rates have Literally Zero Effect on House Prices in Israel?

TL;DR

Standard Economic Theory tells us that if the cost of money increasses, i.e. interest rates, then we should expect assets values to come down, especially homes prices.That’s common sense. In Israel, however, rising housing prices continued to intensify in the first half year. As of March, apartment prices rose by 15.4 percent in annual terms. Alongside this development, despite a slow down in the increase of building materials costs. Our research suggests that the mortgage rates have had an insignificant impact on home prices.Let’s hypothesise on why that phenomenon occurred.

The Graph below compares the Average Rate of Interest on CPI-Indexed Mortgages. The index averages the mortgage rates over different maturities, from up to 5 years (including) to over 25 years. The second data series is the national housing prices index, compiled by the Central Bureau of statistics. In order to compare apples with apples, and understanding the broader picture, both series were rebased to 1994.

house market 2022

At first look, both series are trending inversely over the longer term. And that makes sense. At closer look however, one can notice an acceleration of the housing prices inflation in periods of global financial turmoils. Particularly after the 2008 mortgage market meltdown and, most recently, the post-pandemic liquidity hang-over.

Most worrying, is the recent hyperbolic increase in prices despite the Bank of Israel’s hawkish shift in monetary policies. Explaining this phenomenon is no small feat, and cannot be approached from a single angle. There are, however a few idiosyncrasies of the Israeli market that are important to highlight in order to acquire an understanding and ultimately help us forecast a trajectory for the prices of real estate in Israel.

The Mortgage Back Securities Market, or lack there of…

The Israeli Securities Authority has repeatedly attempted to foster a regulatory environment auspicious to the development of functioning ABS (Asset Backed Securities) and MBS (Mortgage Backed Securities) market. For those who are new to this notion, Mortgage-backed securities, called MBS, are bonds secured by home and other real estate loans. They are created when a number of these loans, usually with similar characteristics, are pooled together. For instance, a bank offering home mortgages might round up $10 million worth of such mortgages. Banks then become mere intermediaries as the sell packaged home loans to the public, passing on their balance sheet risks to the markets.

Those financial tools were thought to promote competition in the markets for loans and free up bank resources thereby allowing for more lending. And competition for loans should, theoretically lower costs to the ultimate consumer i.e. homebuyers. That was fine until it wasn’t…. in 2008 when institutions and individuals got caught in a hysterical meltdown of these securities. Israel local markets relative backwardness actually saved the housing market. That is not to say, however, that local institutions did not hold such securities on their books. The opacity of the banking regulation and the concentration (too big to fail..) of the financial industry again saved the country from the meltdown. But that’s another article…

So how does that help us explain the recent meteoric rise in home prices despite rising mortgage rates. Well it does help us explain why the market did not spook since the loans still being held by the large banks. In the US, at the height of the pandemic, MBSs plummeted and the Fed intervened in order to artificially suppress interest rates. The Fed became the de facto only buyer of such securities , holding over 40% of the entire MBS market. Beyond the rise in interest rates, it is the scaling back of mortgage lending by banks and non-bank institutions that potentially hurts the market.

So in Israel, that didn’t happen, because (or thanks to) the cartel structure of the Banking sector and the inexistent secondary lending market. Interestingly, REITs and developers didn’t go through the lending route to fund their growth. They went through the equity market, punctually issuing stocks. Although stocks are riskier than bonds to the investor, they bare no immediate consequences to the issuer.

Roni and Ifat Irani buy Tel Aviv apartment for NIS 145m

Relative low Household Debt levels (still low but rising..)

Pre-pandemic, the ratio of household debt to GDP in Israel stood at 42%, while in many other countries the ratio exceeds 100% (as of 2017), and yet it is on the rise. The expansion of Israeli households’ debt in the past decade stems from a number of factors: the rise housing prices, the low interest environment, and an increase in the supply of credit and private consumption. Israel’s household debt balance at the end of 2017 stood at NIS 530 billion – an increase of 5% since 2016. Between 2008 and 2017, household debt increased by 84%. Total housing debt increased by 70%, while total non-housing debt increased by 114%.

Household debt is lower in Israel than in other countries.

The volume of new mortgages in 2021 was high in historical terms, which corresponds to the high level of transactions in the housing market.
In contrast to the rapid growth in housing debt, the quantity of nonhousing debt grew only moderately following a steep drop in 2020 at the height of the COVID-19 crisis, but its rate of growth has accelerated in recent months.
As of the end of November 2021, payments had yet to be renewed on about 9 percent of the mortgages on which payments had been deferred and on 1 percent of nonhousing credit on which payments had been deferred. The quality of total household credit is better than during the pre-pandemic period.

The Endemic Dearth in Available Housing Units

We’ve argued in our previous posts that the serious drought in Israel and in particular, in the Tel Aviv area is the single most significant factor causing the skyrocketing affecting housing prices. Home prices in Israel rose at a higher rate than rents during the COVID-19 crisis and that rate has even accelerated in recent months. We think that the likelihood of a decline in prices in the short term appears to be low at the moment, due to:

The rise in demand
The static level of building starts and some slowdown in building completions.
And the price of land in the Israel Lands Authority (ILA) tenders is liable to raise home prices in coming years.

The COVID-19 crisis did not reduce demand for housing, and starting from the end of 2020 there was even an increase in demand among all groups of buyers. It may be that the Central Bureau of Statistics (CBS) reports of a sharp drop in the rate of building starts during the second quarter of 2020 contributed to this outcome. First-time home buyers returned to the market, following the conclusion of the Buyer’s Price program. Home upgraders returned to the market after a long period in which it was difficult to sell an existing home and therefore they had given up on the idea of purchasing a new one.
The increase in demand was only partially met by supply. This should be viewed against the background of a shrinking inventory of new homes waiting to be sold and a sharp increase in the prices of building inputs as a result of higher raw material and transportation prices due to the global crisis.

We expect the logistical constraints that plagues all sectors of activity and in particular, the building sector to ease off. But the phenomenon that came in as a curve ball, is the consolidation of the market. Smaller and newer actors in the market have been struggling to deliver new housing units to the market, forcing them to sell their projects to the dominant market participants. What we are experiencing is a cartelisation of the sector, transferring more pricing power to the bigger operators, whilst, in parallel, shelving projects that would have otherwise been completed. What we are witnessing are houses prices increasing at a faster pace than the prices of the materials used to build these houses. (See figure below)

In conclusion, there is no conclusion. Prices are rising and at best will stabilize at a higher equilibrium. The only solution we anticipate would lower prices is a significant increase in new housing units hitting the market.

Published November 26, 2022