Young Couples/Adults are Waiting out markets

A decline in apartments sold was felt all over the country in the first quarter with a 15% drop in sold apartments from the last quarter of 2012 to the first quarter of 2013 according to the Central Bureau of Statistics. Statistics reflect Hadera to Beer Sheva, where there was a 27% drop. This statistic differs from my April 23rd post which also included housing starts bringing that figure to 20% from the prior quarter.

Most affected by the current real estate market are young couples and young adults where sellers still hold on to high rental prices as well asking prices for sales. The young demographic is choosing to remain at home, living with parents. High real estate prices and the austerity measure of 40% down payment required by the bank of Israel are the main cause.

In Israel unemployment levels are healthy at about 4.5% but the basic salaries for those entering the job market are hindering affordability to young people. Young adults and parents here  are choosing to wait out the trend downward hoping for lower prices as well as a change in government policy making housing more accessible and affordable. Traditionally parents in Israel will help their children to purchase, but wary parents are also looking for a decline in prices and required downpayments.

A similar situation can be found in the United States but has been created for different reasons, housing and rental prices are still affordable in most major US cities but the lack of even minimum wage jobs is causing a staggering 85% of college grads with bachelor’s degrees to return home to live with parents according to Time Magazine study.  Of these grads 54%  are unable to find work and instead move on to higher degree education hoping to be in a better position while waiting for economic recovery.

Q1 Statistics reflect downward Housing Demand

The Central Bureau of statistics reflects what realtors around the country know, demand is down for housing both in the rental and sales markets. Compared to Q1 last January, 2012, apartments sold or built reflect a drop of about 20%, since the prior quarter, demand is down 6%.  This drop affects mainly the markets of Tel Aviv and environs and the southern sector.

Demands were slightly better in Haifa and Jerusalem.  Many are asking what exactly is the cause of this drop in both the rental and sales markets. Chairman of the Real Estate Appraisors Association, Ohad Danus, claims the drop is a direct result of intentional government sanctions and austerity measures in the marketplace instituted in 2011. He stated,  “the developing trend is extremely troubling, because while the natural growth in Israel cannot be suppressed and should even be encouraged, the housing market can be suppressed – and this is what the government has been doing successfully in the past year.”

The recent trauma of rocket attacks last fall as well as the significant drop in foreign currencies such as the US $ and the Euro as well as the British pound are factors in this author’s opinion that cannot be overlooked.  Even if foreigners are not entering the marketplace with their currencies, many Israelis have their capitol invested in foreign currency savings accounts. Foreigners entering the Jerusalem market has long been a significant factor and with their currencies down and fears of war heightened fewer foreigners are entering that marketplace.
The good news is for those who have the capital to invest the contrarian view is that 2013 is the year to purchase while prices decline.  Experts predict 2013 spring and summer months may see increase in activity but no change for the better in prices for sellers and landlords. There is still plenty of inventory in the major cities but only sellers with realistic goals and who need to sell will be willing to drop their prices to a real market value.

Tent Cities protest high cost of city rentals

Since the 40% down payment austerity measures went into effect, landlords around the country in spring saw their opportunity to ‘raise the rent’.  I republish here the link to Haaretz  I have personally seen rents go up to levels that it will take more than 50% of combined income for Israelis to afford the gap. 

In real estate usually housing is forced into regulation by market supply and demand, austerity measures have created a false demand by pushing buyers to the sidelines and renters are taking it on the chin.

Government’s temptation worldwide is to put its hands too deeply into markets. In the case of Israel hands off would be the better approach, put the 40% down payment on the foreign investor and ease access to mortgage loans for locals to help bring the market back into balance. Also the Prime Minister should expedite plans to build more affordable housing units and release lands in outlying areas near big cities for development.

Is there a real estate bubble in Israel?

For those hopefuls waiting for a future of lower prices, sorry to say the answer is “no”. According to Ha’aretz, July 27, 2010, the rising prices in the housing market are what this author agrees with, what is going on now is a correction.  Prices dropped from 1999-2004 where there was little growth or development.  This has created pent-up demand with no end in sight. There are growing numbers of households in the country exceeding new construction rates driving all prices upwards.

Ha’aretz describes a “real estate bubble” as created when the financial conditions enable land and housing prices to climb and climb, and borrowers base their decisions on the assumption that asset prices will continue to increase.

Throughout history, real estate bubbles have been characterized by a rapid increase in borrowing by buyers: They bring less and less equity to the deal, and borrow a greater and greater proportion of the home’s value.

Israeli banks have held to tough lending policies for decades, demanding an average of 20-40% down ensuring equity as well as qualifying buyers.  The banking crisis in other Western countries is not happening here.

What is happening is rental prices are being driven up due to the fact that older couples, new immigrants and young couples cannot afford to own in the hubs in which they are working. This may indicate a slight correction in prices, but little hope for those who will continue to look outside their work areas to farther flung suburbs for their housing needs.

Rentals Prices in Israel Rise in July

The new Ramat Aviv, hot location for rental and purchase

The new Ramat Aviv, hot location for rental and purchase

Another sign of the strength of the real estate market in Israel for ownership and investment is that rental prices countrywide spiked in July from Beersheva to Tel Aviv to Jerusalem. According to Ynet news prices climbed an average of 4% in July alone.

The fours years of recession from 2000-2004 brought a reduction in rental prices and a significant halt in new building.  The recession was security based, not due to the banking/mortgage industry.  Now pent-up  demand for housing, especially rentals as families wait for their new apartments to be built from paper to completion, which can now take two years.

Our personal situation also caused us to look for a rental apartment and we found that rental prices in most communities in the last two years have risen since 2007 ; 35-50% depending on location.  The devaluation of the $ to the Shekel has now caused the average rental price/contract to be quoted in shekels only. 

In Jerusalem, the coastal communities of the Sharon and Tel Aviv the average 3 bedroom rental is now ranging from 4500-6500 NIS; aproximately $1250-$1600 per month.