the price bubble debate


For years now there has been a debate in Israel over whether or not real estate prices are artificially inflated in an asset bubble situation which will burst in the near future thus imposing severe losses upon anyone who purchased at the pricing peak, like those who bought property in the U.S. in 2007 and are still waiting to recover their losses. I am of the opinion that it is not. I believe that barring a general, widespread economic downturn the rate of price increase may stabilize but prices will not fall. I have finally found a high-ranking government official with a sharply contrasting viewpoint. His interview in The Marker (7 February 2016) merits translation in full:

KAHLON'S MAN PROMISES: "THE PRICE OF FLATS WILL FALL BY 15% BY THE END OF 2017. IF NOT, I WILL RESIGN."

"I believe that apartment prices will begin to come down by the end of 2016 and I estimate that by the end of 2017 they will decrease by 15%. If they do not decrease, as I have announced and promised, I shall resign my post." Thus announced Avigdor Yitzhaki, head of the Government Housing Office in an interview with The Marker TV and the Knesset Channel.

Meanwhile, despite the government's promises about lowering the cost of housing, which we also heard back during Yair Lapid's term in office as Treasury Minister, the prices of residential flats continue to rise rapidly. Last week the OECD published a report about the Israeli economy which shows that the increase in housing prices in Israel in the last two years was particularly sharp in comparison to other developed countries. "The report states that the residents of Israel are amongst the happiest in the world with levels of health and education amongst the highest in the world," says Yitzhaki in response, "I prefer to see the glass half full."

Regarding the increase in prices in Israel Yitzhaki explains that the excess demand for housing is derived from the fact that the number of housholds has grown faster than the number of flats and that investors are turning to real estate due to a lack of alternatives. According to him, "Excess demand is creating a bubble."

The OECD report also expresses concerns regarding the quality of flats which are being built pursuant to the fixed-price for homeowners program. Yitzhaki seeks to calm these worries. "We have established standards and specifications for the flats which will be sold pursuant to the fixed-price program including the components which the purchaser will receive. This is a higher standars than that which one receives from the standard flat of a private contractor." Yitzhaki adds that in every project there are appointed inspection companies which will ensure compliance with the established standard.

But the public doesn't believe that the government will lower the prices, and the evidence of that is the 120,000 residential purchase transactions which occurred in 2015.

"Most of the transactions are transactions for second-hand properties. One third of the transactions were for new flats, and this does not indicate what will happen in the future. In order to solve the housing crisis we need to produce more flats. In 2015 we have over 53,000 building starts."

The Central Bureau of Statistics publishes data on housing starts and as of now data are only available through the first nine months of 2015, accoring to which there were 35,900 housing starts during this period. In order to get to 53,000 the number for the fourth quarter would have to be extraordinarily high.

In June the Treasury Ministry bumped up the purchase tax applicable to investors in residential flats in the hope of keeping them out of the market. The share of investment transactions with respect to all residential purchase transactions sank for a few months but by November had increased by about twenty percent according to data published recently by the Official Economist's Department of the Treasury Ministry.

"We don't agree so much with this data," says Yitzhaki. "There is a significant decrease in the activity of real estate investors due to the increase in the purchase tax and also what is happening in the market. In November investors not only bought apartments in the periphery but also sold apartments."

Yitzhaki adds that the legislative proposal regarding the establishment of REIT funds, which has passed its first reading in the Knesset, will enable, "the investment of funds linked to real estate - for investors and young couples alike."

In order to realize all your plans the government will need to hold out.

"Today I'm no longer a politician. If I had to speculate, I'd say this government will last for four years."

END OF TRANSLATION

Let me first address the government fixed-price program for homeowners. Pursuant to this program developers which bid on government land tenders are obligated to provide a set number of units at reduced prices to qualifying purchasers. It should come as no shock to anyone that the builders are doing their utmost to cut corners and reduce costs with respect to the discounted units which they are forced to sell at below-market prices. Mr. Yitzhaki's solution? More bureaucrats! Send a bunch of quality control inspecors into the field to collect bribes . . . oops I mean ensure compliance. Brilliant.

Most significantly of course is how to deal with contrary data? Ignore it and manufacture your own figures out of thin air.

It is also rather telling that the same fellow confidently predicting a drop in housing prices is also confidently predicting that the current 61-seat coalition will serve out its full four-year term. The average Israeli administration lasts twenty-two months.

I cannot say with absolute certainty that Israel is definitely not experiencing a housing price bubble. I can however say that this opinion is seen rather infrequently in the Hebrew-language business pages. Indeed, this previously unknown aparatchick only made headlines because of such a bombastic assertion. Moreover, this most vocal advocate of the housing bubble theory (1) believes in the efficacy of government central economic planning, (2) ignores inconvenient data which contradicts his thesis, and (3) did not hesitate to make another bold prediction, as to the current government's staying power, based on nothing whatsoever.

Decide for yourself.

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