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Living with parents: the housing crisis in Israel is worse than you think - voila! Of money

2022-08-26T04:32:25.787Z


The Bank of Israel dreamed and did not raise the zero interest rate, high-tech wages are high, parents used leverage to buy apartments for their children - and if that wasn't enough, even the war in Ukraine contributed to the increase, twice


Living with parents: the housing crisis in Israel is more serious than people think

The Bank of Israel dreamed and did not raise the zero interest rate, high-tech wages are high, rich parents used leverage to buy apartments for their children - and if that wasn't enough, the war in Ukraine also contributed to the celebration of housing prices.

Even the hard data doesn't tell the whole story

Shlomo Ma'oz

25/08/2022

Thursday, August 25, 2022, 3:01 p.m. Updated: Friday, August 26, 2022, 7:26 a.m.

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There are not enough apartments, there is not enough money to buy an apartment.

And those who are satisfied with the dry data ignore the extent of the problem, despite the decrease in the purchase of investment apartments (Photo: ShutterStock)

"The boy is thirty years old, he has a high fever, he is lying on the sofa at his parents' house, yes he is thirty years old, he has a high fever, he returns to the room of his youth... He is thirty years old but still does not know what he will do when he finishes the army" - like this Written in the immortal song of Ehud Banai, which seems to reflect what will happen in the coming years in Israel.



The state is pushing young people, young couples and extended families who desperately need another room out of the housing market, and is denying them a basic property for anyone seeking a roof over their heads.

The fatal combination in recent years of the introduction of low interest rates by the Bank of Israel, which was a daydream, and a low supply of land planned for construction on the part of the government, which owns most of the land and even distributes it, led to a jump in apartment prices to the highest of our knowledge.

Already adults, even with children, but still living in the parents' house (Photo: ShutterStock)

How much did the apartments become more expensive?

Apartment prices have risen in the last twenty years - until the months of May-June this year, at an average annual rate of 5%.

For comparison, the S&P 500 index, which is a reference point, rose in the last twenty years at an average rate of 8.2%, (the working assumption that the 500 index will be at its current level by the end of the year, here and in the following calculations).



In the last fifteen years, apartment prices in Israel have increased at an average annual rate of 7.5%, the 500 index has increased at an average rate of 7.3%, increases close to each other.

In the last ten years, apartment prices in Israel have increased at an average annual rate of 6.2%, the American 500 index has increased at an average rate of 11.5% per year.



In the last five years, apartment prices have increased at an average annual rate of 5.5%, the 500 index has increased at an average rate of 9.6% per year.

The one who helped to push the housing prices up was the Bank of Israel, through an interest rate that in the last five years was at an average rate of 0.16%.

In the last three years, apartment prices have increased by an average annual increase of 8.93%.

The American 500 index rose on average at an annual rate of 9.4%.

Here too, the person who helped apartment prices compete well with the 500 index was the Bank of Israel's interest rate, which averaged 0.17% over the past three years.



The public understood the central bank's hint: borrow cheaply, leverage and buy more and more apartments, cheap money was thrown from the Bank of Israel and apartment prices rose.

In the last two years, apartment prices increased at an average annual rate of 12.62%, the 500 index increased during the period at an average rate of 6.1%.

Again, you won't believe it, the person who influenced the apartment prices this time too was the Bank of Israel's interest rate, which was on average 0.15%, the leverage increased, the American 500 index fell.



In the last year, apartment prices rose by 17.8%, the Bank of Israel's interest rate averaged 0.2%, the celebration of the leverage increased.

In the last three months, apartment prices have increased at an annual rate of 19.57%!

And guess what happened?

The Bank of Israel this summer from its slumber, the Bank of Israel's interest rate in the last three months averaged 0.48%.



If in the first years reported above, the 500 index gained (on average), then as the years went by the failed policy of the Bank of Israel with the negative real interest rate, resulted in the American 500 index falling behind.



The Bank of Israel finally woke up from its slumber and delusions this week, and raised the interest rate by a sharp rate of 0.75% to .2%.

We should congratulate him for fighting inflation, but we should also be dumbfounded that in the announcement he issued regarding the interest rate hike, housing prices and rents were addressed in only a few lines.

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The high-tech industry, which is filled with young workers who earn high wages, brought buyers into the housing market who were not afraid to pay more (Photo: ShutterStock)

The experts are wrong

A work conducted by the economists Yossi Yakhin and Vinon Gamarsi from the Bank of Israel, and published in July of this year, cites a number of reasons for the increase in apartment prices;

A shortage of apartments, an increase in the disposable income of households, as well as the monetary policy that contributed to the increase in prices during the period reviewed in the study: 2008 - when prices began to rise until 2011. According to the researchers, the contribution of the monetary policy was secondary.



The researchers also claim that the contribution of the monetary policy, i.e. the low interest rate, starting in 2012, is negligible.



I disagree with this conclusion.

At a time of high price increases, the study claims, several households will tend to live together, especially children (including married ones) with their parents.

The CBS checks the number of households as the number of people living under one roof. That is, it is not possible to measure the demand for apartments based on the number of households in relation to the increase in the population of households, because there is the potential of hidden households, those living with parents for example, which does not indicate on the extent of the problem and the lack of apartments. That is why the housing market planners lack a hidden figure of the demand for apartments precisely at a time of rising prices.



At a time of rising prices, housing density in Israel increases and part of the demand for housing services is hidden. The phenomenon is global, in the USA currently 25% of young couples live with their parents



According to the CBS, according to the trend data, the requested amount of new apartments began to decrease since October, when the Treasury imposed the purchase tax, from the end of November 2021, on buyers of a second apartment or more.

Since October 2021, the demand for apartments has been decreasing at an average monthly rate of 1.9% after previously there was an increase at a monthly rate of 1.4% from May 2020. In other words, the treasury's hand over the investor public had an effect.



Only about 69% of the demand for apartments is for new apartments.

The rest of the apartments that are being built are not for the purpose of selling them: apartments that were built for rent, purchase groups or self-use.

For personal use, it was found that they make up 64% of all the apartments built that are not for sale, of which 42% are built in the north and 19% in the south.

Another 6% are being built that are not for sale in purchase groups, 54% of the purchase groups in the center of the country.

About 13% of the apartments not for sale are built for rent: 32% in the north of the country, 29% in the Haifa district and only 14% in Tel Aviv.



So in general it can be said that in the periphery they prefer self-construction of apartments, hoping to bypass the contractors' profits, in the center they concentrate on purchasing groups and the lowest rental construction is precisely in Tel Aviv, where they actually asked for a high price.



In the second quarter of the year, the requested amount of apartments was 15,970, a decrease of 10.2% compared to the first quarter of the year, even after deducting seasonality there was a decrease of 7.6%, according to the CBS.



According to the Chief Economist at the Ministry of Finance, in June there were 10,500 transactions, including the "price for the tenant", a decrease of 24% compared to June last year. Even excluding the price for the tenant, there was a decrease of the same rate of 24%. The purchase by investors in June of this year, according to the Treasury data There were 1,660 apartments, a drop of 43% compared to June last year.



This is the maximum rate of decline since the introduction of the increased purchase tax at the end of November last year.

The investors' share of all transactions decreased in June to 16% compared to 19% in June last year.

The stock of apartments in the hands of investors decreased in June by 750 apartments, even though the sale of apartments by investors decreased by 18% compared to June of last year. In the Tel Aviv area, the purchase by investors decreased by 62%, in the center a decrease of 50% compared to June of last year



. by contractors in June there were 3,600, a decrease of 23% compared to June last year, the decreases - in each month compared to the corresponding month a year earlier - began as early as February of this year. Second hand transactions in June were 6,900 apartments, a decrease of 24% compared to June last year. Also the purchase of a "first apartment "Decreased in June of this year to 5,200, a 12% decrease compared to June of last year. Purchases by young couples, minus the price per tenant, decreased by 10% to 4,200 apartments.

If the lack of apartments is not enough, construction inputs have also increased significantly (Photo: ShutterStock)

The price paradox

There is a kind of conundrum here: the demand for apartments has been falling in recent months, while apartment prices continue to soar.

What's going on?

One of the explanations could be that the reporting periods are not compatible, meaning that the latest price increases refer to the month of the May-June pair of months, while the demand data refer to the end of June.

A second reason is the acceleration in the increase in the construction input price index, which is soaring due to a rise in the costs of materials mainly, not labor wages.



The input price index for residential construction rose by 6.6% in the last year leading up to May-June, even excluding wages, the index for the two months rose by 11.3%.

The gross profit of contractors is usually about 15%, which means that the general increase in the index wiped out half of the profit and pushed the contractors to raise prices.



The rate of increase in the index of residential construction inputs accelerated later in July to 6.8% and 11.6%, respectively.



A third reason is the high leverage rate of apartment buyers in the center.

According to the chief economist at the Treasury, parents in the central area apparently support their children at twice the rate of those in the periphery. That is, wealthy parents who buy their children a leveraged apartment. A fourth reason for the Tel Aviv area, the average salary of apartment buyers in the central area who are employed in high-tech.



The hitkists made up a quarter of all apartment buyers in June. Their average salary is NIS 58,600 per month, yes, close to NIS 60,000 per month, double the average salary of all apartment buyers in June. They can pay more and apartment prices are soaring. The



contractors are determined to sell: in June, according to the Treasury, about 60% of the apartments were sold "on paper", the buyers want to guarantee a price for today and the contractors have switched to increasing financing from the money of the buyers who pay more today for an apartment tomorrow. Apparently it is cheaper for the contractor to finance himself from the buyers' advances than the cost of capital in the margin that he has to pay to banks and other credit providers, Non-banking.



The interest rate in the capital market is soaring, straight and smooth.

Because they sell "on paper", the stock of apartments in the hands of contractors remains unchanged (according to the CBS, 47,100 at the end of June).

It is true that there is insurance for the tenants' payments for the payments they make to the contractor before receiving the apartment, according to the Sales Law, but during a delay in receiving the apartment, if the contractors fail or the execution contractors collapse, the compensation to the apartment buyers is not complete in terms of the needs of the tenant to move to another apartment while waiting for the apartment to be received purchase, at the same time the rent only goes up and may hurt him.

Immigrants from Ukraine are received by the former Prime Minister, Naftali Bennett.

We are happy with every immigrant, but about 35,000 new citizens have been added to the list of those waiting for an apartment (Photo: Paul, Hadas Proosh)

The war in Ukraine

While everyone is waiting for a calm in the housing market, if the completion of construction increases and reaches the pace of construction starts, and if the rising interest rate affects the apartment market, a side wind will come that could inflame the prices.

Because of the war in Ukraine, about 35,300 immigrants immigrated to Israel in the first half of the year, 18,900 from Russia, 12,200 from Ukraine, this compared to 27,300 immigrants in the entire year of 2021. The



demands are getting stronger and Israel is locked in frequent elections and changes of governments, which does not allow for basic and long-term decisions to be made in the area of ​​chaotic housing.

Even the Bank of Israel noticed what was happening and pointed out that the political uncertainty could cloud economic activity in the economy.

The influx of young couples to their parents will increase, there will be those who will rent the apartment they own and move in with their parents so that they can pay the mortgage and support their children with minimal respect.

  • Of money

Tags

  • real estate

  • Housing shortage

  • The housing crisis

  • New apartments

  • Bank of Israel

Source: walla

All business articles on 2022-08-26

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