While a strong wave of interest rate increases sweeping the Western world has led to price declines in the United States, Canada, and New Zealand, the Israeli housing market, in the meantime, is showing resilience and even continuing to become more expensive. Is there something unique about this market, or will it eventually feel the blow as well?
Starting last April, Bank of Israel Governor Amir Yaron began raising the interest rate sharply, in order to deal with rising inflation. While the interest rate in April was still 0.1%, by the end of August the rate was already set at 2% after a further increase of 0.7%. Expectations that the Governor would announce the fifth successive rate hike were fulfilled this past Monday when the rate was raised by a further 0.75% to 2.75%.
This was not done singlehandedly. Under the leadership of Federal Reserve Chairman Jerome Powell, almost all of the Western world from Canada to Australia, central banks acted in a similar manner to curb the price increases caused largely by the energy and commodity crisis created by Russia’s invasion of Ukraine and the sanctions imposed on Russia in the West, as well as due to the ongoing effects of the Covid-19 pandemic.
One of the markets most significantly affected by the interest rate increases in Western countries is the housing market. The sharp interest rate increases make it difficult for buyers to continue borrowing large-scale mortgages, and thus in many places home markets have moved from a state of sharp increases to a state of significant price declines. This has happened in the United States, Canada, Australia, and New Zealand.
But there is one place where this has not yet happened – Israel. The most recent home price index, published in mid-September, indicated a further increase of 1.3 percent, and an annual increase of 17.9 percent. The question arises as to why the Israel real estate market shows such resilience, even in view of the sharp interest rate increases.
16% price drop in Canada
The economy that has reacted most clearly to the central bank’s interest rate increase is Canada. By the beginning of this year, home prices in the country had risen by nearly 50% within two years – an extreme figure even relative to Israel. However, since the central bank began to increase the interest rate, the momentum in the market has changed completely. So far, there has been a decline of 16 percent in home prices, from March to August, and assessments in the banking system are that by the end of the year the rate of decline will reach 25 percent.
In New Zealand as well, the housing market reacted strongly to the gradual interest rate increases that began in November 2021. During the same year, apartments in the country increased by about 30 percent, but since the interest rate began to increase, there has been an 11 percent drop in prices, with economists believing that prices have not yet reached the bottom.
In the United States too, the trend began to change last July. Up to that point, there had been an annual price increase of nearly 20%. In July, there was a decline of 0.8 percent in home prices, which is considered the sharpest monthly decline since the beginning of 2011. When the August data are published, we will know whether there is continuity to this.
The unique characteristics of the Israeli market
In Israel, as noted, the situation has been different so far, and the question arises as to why? After all, in Israel as well, the increase in the interest rate has led to a significant increase in mortgage borrowers, who, according to the Association of Mortgage Consultants, are now forced to pay an average of NIS 1,000 more each month. Recent publications of the Central Bureau of Statistics (CBS) show that while the number of transactions for the purchase of a home has declined significantly, by approximately 30 percent less than in the same period last year, home prices continue to climb.
One distinctive feature that arises in every discussion about home prices in Israel is the exceptional demographic growth rate in Israel, which in 2021 stood at about 1.8% compared to 0.7% in the United States or 0.8% in Canada. With such a growth rate the pressure on the levels of demand for apartments is heavy with or without interest.
Another important feature of the Israeli housing market, which may explain the weak influence of the interest rate increase, is the lack of an alternative for homebuyers in Israel. Unlike most Western countries where there is a sophisticated long-term rental market, which is a quality alternative to living in an owned apartment, in Israel the rental market is still based almost entirely on apartments owned by private households that offer one-year contracts. In this way, all households are exposed to an increase in rent on an annual basis and sometimes even to unilateral notice for termination of the rental. It is easy to understand why in such a reality, most Israeli households aspire to purchase an apartment, to put an end to the risk and instability of the rental life.
Despite all the aforementioned explanations, it is impossible to rule out the possibility that in the Israel housing market too, an increase in the interest rate will eventually lead to a change in trend. Six months have not yet passed since the Bank of Israel began to increase the interest rate, and the most recent home price index relates to transactions made during June and July—that is, no more than three months after the increase began. It is quite possible that the market takes time to internalize the new rules of the game, and that a price drop will eventually be seen here as well.
