According to the Swiss Bank, an 18% increase in prices within a year has greatly distanced the level of home prices from the earning capacity of local residents and significantly increased the chances of a real estate bubble in the city. It was also found that in Tel Aviv, the ratio of the price of an apartment to the price of rent is the highest, out of the 25 global metropolitan cities examined. The bank forecasts a downward correction of prices.
“Tel Aviv is at a high-risk level for the formation of a price bubble in the housing market” was stated in the annual UBS Global Real Estate Bubble Index published, published earlier this month by the Swiss Banking Corporation. This is the first time that Tel Aviv has been included in the list of cities with a high level of risk of a price bubble since the report was first published in 2015.
The document describes the Tel Aviv apartment market and notes that:
“Nominal house prices in Tel Aviv have roughly tripled between 2001 and 2017. Rents almost kept pace with the price increases, reflecting a fundamental housing shortage. Higher mortgage rates and stretched affordability did cause a brief period of correction, but by 2019, the market was back in another explosive phase of price growth. Between mid-2021 and mid-2022 alone, prices climbed by 18%, the highest rate since 2010. And outstanding loan volumes shot up by 18% as well, the fastest pace in 25 years. Consequently, the market ranks in bubble risk territory… the probability of a sharp but short-lived correction is high if mortgage rates rise further.”
Price-to-income multiples exceed 10
Tel Aviv is also mentioned as one of five cities in which “The number of years a skilled service worker needs to work to be able to buy a 60m2 (650 sqft) flat near the city center” is greater than 10. The other four cities are Hong Kong, where such an apartment requires 24 years of work, and then Paris (15 years), Tokyo (14 years), London (12 years), and Tel Aviv (11 years).
Munich, Hong Kong, and Tel Aviv are also cities with the highest price-to-rent ratios. In the three of them, the flat should be rented for 44 years in order to pay for the flat. In 2012 the ratio was 34 years.
The Tel Aviv apartment market has always been considered incomparable in Israel because Israel is a country that is mostly built around one central metropolis where the majority of economic and cultural activity takes place. This means constant pressure on home prices in the city – both for purchase and for rent, in view of the constant situation in which the supply of apartments is significantly lower than the number of households who would like to live in the city. This has been compounded over the years by strong demand from abroad, mainly Jews who, although still residing abroad, have purchased a property for themselves in Israel, whether for summer vacations and holidays or as a result of their assessment that they will need it in the future.
According to data from the Central Bureau of Statistics, the average price of an apartment in Tel Aviv in the second quarter of 2022 was NIS 4.16 million, compared with NIS 3.42 million in the corresponding period last year. A 4-room apartment was sold in the second quarter at an average price of NIS 4.7 million compared with NIS 4.12 million in the corresponding period, and a 3-room apartment was sold for NIS 3.74 million compared with an average price of NIS 3 million in the corresponding period.
However, it should be noted that in terms of purchase prices, Tel Aviv was not exceptional this year compared to the entire Israel real estate market, which has increased by 19% in the past 12 months. In the area of rentals, however, the city has broken all records in the past year, according to an analysis made according to data from online apartment websites, in Tel Aviv, there has been an increase in rental prices of 25% in the past year in new rental contracts of tenants who enter the apartment. This is the highest rate of increase in Israel, which it shared with Ra’anana. The average rent in Tel Aviv is the highest in Israel, currently at NIS 10,600.
UBS Bank’s forecast of a real estate bubble in Tel Aviv and its analyses of the Tel Aviv housing market are, of course, estimates only and nothing more, however, they fit well into the current atmosphere in the housing market, whereby after a prolonged period of a year and a half during which prices rose sharply, the chances of a downward correction in prices in the coming months are high.