Waning interest by investors expected to bring down property prices
Posted on 16. Apr, 2010 by Buy-It In Israel Staff in Israel Real Estate
Property in Tel Aviv ©iStockphoto.com/Terry J Alcorn
The steady increase in the purchases of real estate in Israel for investment, which peaked in 2009, is showing a declining trend in the first months of this year on the back of rising interest rates and a strong recovery in financial markets.
There has been a steady rise in purchases of residential real estate for investment since 2002, peaking in the first half of 2009, when one-third of apartment purchases were for investment. In the first six months of last year, 13,386 apartments were bought for investment purposes, out of which 17 percent were located in Haifa, 15 percent in Beersheva, and 9 percent in Jerusalem. In Haifa and Be’er Sheva, investment purchases exceeded a third of all apartment buys during certain periods of 2009, while in Tel Aviv, investment purchases accounted for a record 55 percent of all home buys.
The trend last year has in large part been fueled by declining interest rates, which reached a record low of 0.5% in March 2009. The lack of better investment opportunities, as a result of the global financial crisis, shifted investor interest from riskier markets to more secure markets such as the Israeli real estate market.
Furthermore, the boom in the Israel real estate market over the past two years has hardly been affected by the global financial crisis, while in other developed countries property markets slowed down or experienced a crisis. As a result of the high demand for investment apartments against an ever increasing shortage of supply of real estate in the market as a whole, property prices have continued to rise even in more inexpensive areas in Haifa and Beersheva. Average apartment prices in Israel jumped more than 30 percent since 2008, following several years when they hardly changed.
However, the lastest figures show that since the beginning of this year, that the real estate sector among investors is losing its attractiveness. The figures point to a significant slowdown in the percentage of investors among homebuyers in the first two months of 2010 compared with the same months last year. According to data from the Israel State Revenues Authority, in the first two months of this year the percentage of investors among homebuyers in Tel Aviv dropped to 34 percent compared with a ratio of 54 percent during the same period in 2009. In the areas of Haifa and Beersheva, which also saw an increase in investor interest in property last year, the ratio of investors among homebuyers fell to around 25 percent to 30 percent at the beginning of 2010 from from 30 percent to 40 percent in 2009.
This shift in trend is largely a result of rising interest rates, which increased from a low of 0.5% in March last year to 1.5% in April this year translating into higher interest on mortgages turning an investment in property less attractive for long-term investors, especially in areas in which real estate prices have gone up over the past year. At the same time higher interest rates open more channels to invest in alternative instruments which were less attractive during the global financial crisis. Furthermore, investors who last year pulled out of the tumbling financial markets and put their money into the real estate market are starting to come back to the capital market as the Tel Aviv Stock Exchange is reaching new highs over the recent months.
Experts in the local real estate market believe that the marked slowdown in demand by investors in the real estate market seen since the beginning of this year will continue as the interest rate environment is expected to continue to rise, while prices in the real estate market are expected to remain stable, making long-term investment into property less attractive for investors. This change in trend of investment property buyers is expected to eventually lead to a decline in property prices in particular in less popular areas, where prices have risen over the past year because of the impact of strong investor buying last year.
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