financial markets – The Tel Avivi ⎸ Property Advisors

Are Inventory Issues Worsening Tel Aviv Real Estate Prices?

The Telavivi — Tue, 14 Jun 2022 12:13:06 +0000

Are Inventory Issues Driving Tel Aviv Real Estate Prices?

TL;DR

Tel Aviv Real Estate Prices have reached dizzying heights. Is there is a sign of easing? The world markets are reeling and in the face of historical inflation, the central banks tightening actions seem futile. What about the Tel Aviv real estate prices? This article is the first of a series dedicated to the analysis of all factors affecting prices of real estate one by one, and emphasize the peculiarities of the market.

Tel Aviv Real Estate Prices have reached dizzying heights. Is there is a sign of easing? The world markets are reeling and in the face of historical inflation, the central banks tightening actions seem futile. What about the Tel Aviv real estate prices? This article is the first of a series dedicated to the analysis of all factors affecting prices of real estate one by one, and emphasize the peculiarities of the market.

Let’s look at one of the most significant factors affecting the price of real estate, in general. Adam Smith taught that the “invisible hand” would take care of everything. Excess demand would be met by supply through the workings of a highly efficient market. Higher prices would attract investment and production would soon meet the increased demand. That’ s all good.

That theory still holds true two hundred years later, in some markets. Before my Keynesian friends disown me, I would like to qualify this statement. And in practice, that Invisible Hand, may take too long and by the time supply balances demand, the damage has been done.

I can’t help but think that, in our Tel Aviv real estate market, supply might never meet demand. Tel Aviv market is the epitome of an isolated market, with limited interconnections with the broader market. Holding money supply and interest rates constant (don’t worry, we’ll get to that in another one of these posts), the supply of available land for zoning and construction, is extremely scarce.

On the other hand, the city’s population is still growing, albeit at a lesser pace than five years ago, but still indeed growing; local economic growth and wealth creation needs no more mentioning.

Over the period 2017 to 2020 (included), the city of Tel Aviv, which excludes the suburbs, grew by a whopping 4.46% whilst the number of residential units grew by 3.78%. That represents a deficit of about 1,500 units. By units, we are referring to an average 85.21 m² apartment.

If you live or recently visited Tel Aviv, you’d argue that the skyline bears an uncanny similarity to Shanghai’s with cranes at every street corner. So to be fair to our friend Adam Smith, new constructions and developments have surged. But I’d argue that these new projects visible today have been initiated at least half a decade ago, answering to the demand at the time. The incremental or the marginal demand however is not being addressed.

True, the city has been supporting the so called TAMA projects, allowing the apartment owners and promoters to add units on top of their existing building structure. Anyone familiar with the process would tell you that it’s a lengthy and painful process which on average takes about seven years, after the existing tenants agree to the terms of the project, not to mention that the net proportion of new apartments in such projects hardly exceeds 40%.

The result is a real estate prices increase of a magnitude and speed, not seen in over a decade. The difference, however is that prices of new homes are now rising more rapidly than of second hand ones as we argued in a recent post.

Tel Aviv real estate prices

The building fury Tel Aviv is currently grappling with, may (or may not) over time, ease some of the supply constraints. Interest rates tightening, however may actually have the perverse effect of stifling the promoters and entrepreneurs and force them to abandon projects, thereby further curtailing the supply of new apartments that we so desperately need.

No doubt the developers’ universe will consolidate, and we are seeing it happening already. The highly leveraged actors will struggle. The prudent ones, however, those focusing on quality, design and location will benefit from the changing landscape. Like in all markets, in times of uncertainty, investors and end-users alike will become more picky.

We’d love to hear what you think! Stay tuned for the next episode where we’ll look at interest rate and currency as factors that may drive Tel Aviv real estate prices.

Q3 2021 The Tel Aviv Real Estate Market in Numbers

The Telavivi — Thu, 31 Mar 2022 15:24:38 +0000

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r48 hotel tel aviv

Israel Real Estate in Numbers Q2 2021

TL;DR

The numbers from the Central Bureau of Statistics are now out. The average home transaction price in Tel Aviv in the second quarter of this year was over NIS 3.5 million, 20% more than two years ago. The Israeli housing market is booming almost exclusively in the big city. The price delta between central Tel Aviv and the rest of the country is widening, despite both being on the rise. Tel Aviv rose more rapidly. Supply is drying out and far outpaced by the soaring demand.

The numbers from the Central Bureau of Statistics are now out. The average home transaction price in Tel Aviv in the second quarter of this year was over NIS 3.5 million, 20% more than two years ago. The Israeli housing market is booming almost exclusively in the big city. The price delta between central Tel Aviv and the rest of the country is widening, despite both being on the rise. Tel Aviv rose more rapidly. Supply is drying out and far outpaced by the soaring demand.

On average, apartments are being transacted at a 10% premium than the same period last year. The average price of a small apartment of one to two rooms rose by 12% to NIS 2.42 million; prices of three-room apartments rose by a similar percentage, to NIS 3.2 million; while prices of four-room apartments rose by 14% within a single quarter, to NIS 4.28 million. Prices of five-room apartments interestingly fell, by 0.8%, to NIS 4.7 million.

The price difference between Tel Aviv and the neighboring Ramat Gan is now at an all-time peak of 54%.Versus Jerusalem, the gap has widened from 46% to 67%, and versus Haifa, from 139% to 200%, meaning that an apartment in Tel Aviv costs three times as much as an equivalent apartment in Haifa. The number of transactions, however, has significantly dropped in Tel Aviv. The supply drought is feeding the upward spiral as new permissions have dropped and land prices soared, thereby making it difficult for promoters to plan new projects.

According to the Central Bureau of Statistics, in May and June alone, 10,600 new homes were sold in Israel. That is more than half the total number of new homes sold in 2011, and almost half the total number sold in 2018. About 20% of it is explained by purchases in the subsidized Buyer Price program. In the first half of this year, more than 25,000 new homes were sold in Israel. That is a dramatic statistic because the rate of purchases of new homes is higher than the rate at which they are being built.
Within a year, the stock of new homes for sale has fallen by 30%, reaching about 36,000 at the end of June. Speculation is a factor, but demand from buyers-occupiers is the main driver for this price increase. Demographics, as well as the high demand for skilled high-tech labour, explain the brunt of this trend. Unlike most other economies, a tightening of the monetary policy is unlikely to hamper the meteoric rise of residential units in Tel Aviv in the foreseeable future.

Developers have caught onto the demand for new homes and have rushed to raise prices. The New Dwellings Price Index has risen by almost 6.5% in the past two months, which compares with a 7.7% annual rise in prices of all homes. Another important statistic in this context is the Building Inputs Price Index, which is rising at an annual rate of 6-7.

Is real estate behaving like oil?

The Telavivi — Mon, 21 Mar 2022 11:41:34 +0000

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What is the Relationship Between Oil and your Apartment?

Expanding the notion that the Tel Aviv Real Estate Market is behaving more and more like the Commodities Market.

What are Backwardation and Contango?

Backwardation takes place when the current price of an underlying asset is higher than the price trading in the Futures Market. Sometimes, the concept of backwardation is misinterpreted with an inverted futures curve. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the future through the futures market. The primary cause of backwardation in the commodities’ futures market is a shortage of the commodity in the spot market.If you think of real estate as a commodity, I know it’s a bit of stretch, but let’s assume this is the case for a moment.

Backwardation is the normal state. Intuitively, if you were considering two identical apartments, the only difference being that one is ready now and the second is ready in 3 years, you’d pay more for the former. There are many practical reasons for the premium that you’d pay. But beyond that fact, there is the concept borrowed from the options theory, of the time value of money. This is a core principle of Finance. A sum of money in the hand has greater value than the same sum to be paid in the future. This is one of the factors that explain why apartments for delivery in 3 years should be cheaper than an apartment ready immediately.

Now in the case of real estate in Israel, a phenomenon is occurring as I pen these lines. The price of apartments in new projects to be delivered in 2 to 4 years have been catching up with the prices of apartments for immediate delivery. Again you probably can think of a million reasons why that would be. But let’s go back to the idea that apartments are a commodity. In financial terms, this movement is a flattening of the curve and could potentially shift into contango.

Contango describes an upward sloping curve where the prices for future delivery are higher than the spot price. Most commodities markets periodically shift between the two states and a barrel of oil for example can be more expensive for delivery in the future than delivery today. But what does it say about the prices of apartments. Why would one pay the same price (or more) for an apartment delivered in 3 years than today? Let’s break it down.

No supply. Short term supply is dramatically low. That is very true for apartments in Tel Aviv especially.
People discount the risk factors of a construction projects to 0.
The value of apartments is expected to rise in the future at a faster rate than expected inflation. Expected inflation is the main factor affecting the time value of money. As inflation goes up the value of money goes down.

So if we read this phenomenon, future apartment prices will go up by more than real rate of inflation, than locking in the purchase of a future apartment at today’s price would be the rational thing to do, much like a future contract in commodities.

There are caveats though:

This can only work if you have no exposure to the interest rate I.e. you buy all cash.
You have a lot of cash sitting idle.
The purchase price today of your future apartment is not indexed to inflation.

A reversal of the phenomenon can be very painful though. In a case where the market for future apartments slows down. That could happen if the stock options of the high tech employees fall out of the money. Or if the real interest rate increases dramatically. Or if there is a rapid increase of supply in the market for apartments.

All these factors have a lower likelihood of happening that the prices of both apartments and future apartments going up in the medium term. But that likelihood may go up nonetheless and that’s all it takes to see the future apartments prices take a nosedive.

Tel Aviv Real Estate Market Report for March 2022

The Telavivi — Thu, 17 Mar 2022 11:50:11 +0000

Tel Aviv Real Estate Market Report for March 2022

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Tel Aviv Real Estate Market Report for March 2022

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The Tel Aviv real estate market has been the subject of numerous news articles as of late, showing impressive growth in pricing, demand, and mortgage lending. This press exposure hasn’t been limited to Israel, but in the international press as well, with Tel Aviv finally being recognized as a global investment hub, not just for high-tech, but for residential and commercial property as well. January 2022 saw the largest month-by-month growth in Israeli real estate prices since 2011, growing 2.1% nationally. The entirety of 2021 saw Israeli residential real estate prices rise by 13%, whereas typically prices in Israel rise 7% per year.

The growth isn’t limited to prices, however, but also in the number of transactions. The net number of Israeli real estate transactions is up 50% from 2019, despite the Pandemic. While transactions are at an all-time high, however, it is interesting to note that this has been made up mainly of local Israeli buyers, with foreigners mainly inactive over the past two years due to travel restrictions.

Tel Aviv Real Estate Market Report for March 2022

While there were notable deals by foreign buyers being done sight unseen, the volume of absolute transactions by foreign nationals has been hit, while the total number of transactions are up. Now with the skies open and with the large influx of built-up demand by foreign buyers reported by real estate professionals, one can expect more deals and higher prices in the short term. Also of interest to note is that the number of real estate investors, define as those investors buying units to rent out, have dropped 70% since before the Pandemic, indicating that the buyers over the past two years have mainly been end-users buying for personal use. This is seen in the 10% increase in rental prices in Tel Aviv in 2021 as less rental units are available.

The issue of stock is a major factor in the price rises, with a record low number of real estate starts being started in both Tel Aviv and nationally. The number of second hand units for sale is also at a low not seen since the early 2000’s. These factors paired with a growing Net Disposable Income of Israelis have contributed to the price rises and these too, can in the short term, continue due to the new number of investors entering the market now that Israel itself has opened up.