Bank of Israel estimates that housing prices in Israel will fall in the short-term, but rally in the long-term

According to the Bank of Israel’s Financial Stability Report, which analyzes the level of stability of the various economic sectors in the first half of 2020, housing prices in Israel are expected to fall in the coming months as a result of the devastating effects that COVID-19 has had on the job market, and the cash-flow difficulties that real estate developers are experiencing. However, in the longer term, the Bank of Israel expects home prices to return to an upward trajectory.

The Bank of Israel’s Financial Stability Report, published on August 11, was the gloomiest in the last decade, and has caused a great stir in Israel since its publication. According to the report, the Israeli economy is at “medium to high” risk, with an emphasis on the credit market and financial assets, such as stocks and bonds.

The report states that the COVID-19 epidemic “has challenged Israel’s financial stability much more than even the most extreme scenarios Israel’s banking system has been preparing for over the years.” The report also warns that a financial debt of over NIS 50 billion is currently owned by companies that could possibly encounter liquidity difficulties if the epidemic or the market worsens.

Short-term and long-term effects on the housing market

In the section of the report covering housing issues, the report states: “Looking to the future, housing prices will be affected by changes in supply and demand that resulted from the COVID-19 crisis,”. “In the short run, there may be a decline in housing prices, especially in peripheral areas where supply has risen greatly in previous years.”

Among the factors the Bank of Israel lists as possible causes for the drop in prices, are “cash flow problems and rising financing costs, which could possibly force developers to lower prices during periods of reduced demand due to uncertainty and buyers’ concerns about their job stability.”

According to the Bank of Israel, the decline in demand for apartments will be affected primarily by the situation in the labor market and by how quickly the market returns to normal. Moreover, a rise in the unemployment rate or a decrease in the average wage are also factors that could lead to a fall in demand. It should be noted that according to data from the Israel Ministry of Finance, the unemployment rate in Israel at the end of July was 12%, or about half a million unemployed Israelis. This compares with only 3.2% unemployment this past February, before the epidemic broke out.

Nonetheless, the Bank of Israel projects that these alarming figures will have a limited, long-term impact on the housing market, since according to an analysis of the characteristics of the people who are currently unemployed, it appears that the crisis has mainly affected very young, and very old, low-wage workers – populations in which the percentage of potential buyers is not high.

On the other hand, the Bank of Israel is pointing to a different issue that could actually lead to a slight rise in demand for apartments in the near future, and that is a fall in interest rates.  If interest rates fall, the bank estimates that, “there may be an increase in demand for housing, considered to be a relatively safe investment, following investors’ withdrawal of their funds from alternative financial investments at the beginning of the crisis.”

In the long term, a supply shortage will lead to a rise in prices

In the long run, the Bank of Israel estimates that housing prices will rise, assuming the labor market recovers in the coming months. This claim is based on the expected decline in the supply of new apartments, which is due to the shutdown of the Israel Planning Administration for an extended period, during the months of the COVID-19 epidemic, as well as to a delay in construction starts of new projects, which resulted from the state of uncertainty and contractors’ lack of financing.

“During the first quarter of 2020, construction starts plummeted 11% compared with the last quarter of 2019, and the number of building permits issued in the first quarter of 2020 was 26% lower than the previous quarter,” the report states.

The report also notes that the shutdown of the Israel Planning Administration, the main governmental body responsible for planning and regulating land use and development in Israel, “has led to delays in the approval of plans and the advancement of vital infrastructure plans.” Moreover, the publication of land tenders for new construction by the Israel Land Authority, which is responsible for managing most of the land in Israel, was closed during the lock-down in March and April. “These delays could lead to a reduction in housing supply in the coming years,” the report continues.

It was also noted that due to the government’s budget deficit that was caused by the epidemic, the Ministries of Finance and Housing decided to discontinue the First-Time Home Buyer incentive program (Mechir LeMishtaken), through which tens of thousands of apartments were sold to first-time buyers at reduced rates. Regarding this issue, the bank noted that, “The program was used as a tool to lower housing prices in recent years. Therefore, the likely outcome of its cancellation is that housing prices will rise in the coming years, especially in areas that are in high demand.”

The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.

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