Is this a trend? Central Bureau of Statistics data recently published indicate moderation in home price increases.
While 2022 has struck a jarring end to the 20.6 per cent rise in home prices, according to the latest data, the annual rate of home price growth has already moderated to 9.8 per cent. The number of transactions in the real estate market fell to a low of almost 20 years – during the first lockdown of the coronavirus, there were fewer purchases than now.
Buyers are in no hurry to buy and are "sitting on the fence" waiting for further moderation in home prices and for lowering the interest rate in the economy. Contractors are building less – current interest rates make projects unattractive, and the entire market is on hold. Where will all this lead us in the coming years, and is it worth waiting to buy an apartment? We turned to the best macro experts at the banks to get an analysis of their situation.
The result was surprising: three veteran experts hold an almost identical opinion: home price increases will continue to moderate in the coming months, but if the government does not proactively take care to increase the supply of housing, the increase in home prices may erupt again in the coming years.
"Building starts have gone down"
According to Modi Shafrir, chief financial markets strategist at Bank Hapoalim: "Against the background of the sharp decline in demand levels, combined with the increase in supply and the increase in mortgage interest rates, our assessment is that the trend of declining prices will continue for at least the next six months. Initial signs of a decline in prices can also be seen in the relatively sharp decline recorded in recent months in land prices marketed by the ILA. On the demand side, the Central Bureau of Statistics published last week that the volume of new home transactions declined in February–April 2023 by about 19 percent compared with the period between November 2022 and January 2023.
Modi Shafrir,
"On the supply side, the stock of homes for sale rose to 55,4, up 56 per cent compared to April 2022. Against the background of the decline in demand, in parallel with the increase in the stock of homes for sale, the number of 'supply months' (the number of months that will pass until all the remaining homes for sale are sold) continued to increase to a historically high level of 21.7 months (in comparison, the number of supply months was about 9.5 months on average in 2021).
"While we expect continued price declines in the coming year, we also expect building starts to decline – and without government incentives for contractors to increase construction volumes – we may see real estate prices rise again from 2025-2024."
"Drop later this year"
The number of building starts declined by 12.10 per cent over the past 4 months, compared with the preceding 12 months, to 62,5 housing units. The Central Bureau of Statistics noted that the net number of building starts (i.e., including demolished apartments) was 12,58 in the past 7 months.
Nira Shamir, Chief Economist at Israel Discount Bank: "Although the CPI surprised to the downside, the rent component surprised to the upside, with owned housing services increasing at an annual rate of 7.6 percent, compared with 7.2 percent in April. It seems that high home prices, along with high financing costs, are shifting demand to the rental market.
"In addition, the exodus of investors from the market and the high volume of unsold apartments create a shortage in the supply of rental apartments. In our assessment, the rate of increase in the housing component will moderate, although also looking ahead, increase faster than the overall CPI, and will continue to be a factor endangering the restraint of inflation.
"At the same time, home prices (not included in the CPI), including new home prices, declined slightly by 0.2 percent. Thus, the annual rate of increase moderated to 10.3 per cent in new home prices, and 9.8 per cent in all homes. Over the past five months, home prices have remained stable, while new home prices declined by 1 percent.
Nira Shamir,
"This trend is consistent with the sharp decline in demand for homes, with a marked increase in the stock of homes remaining for sale. Therefore, in our assessment, we expect to see a moderate decline in prices later in the year as well.
"Although data published by the Central Bureau of Statistics last week indicate that in the first quarter there was a sharp decline in building starts and completions, but, as noted, we saw a sharp increase in the stock of homes remaining for sale. Therefore, we believe that this fact will have a greater impact on home prices in the coming period. In contrast, the current decline in building starts is likely to affect trends in real estate prices in two or three years."
"The price increase will come"
Ronen Menachem, Chief Market Economist, Mizrahi Tefahot Bank: "In recent months, we have witnessed a marked slowdown in home prices in Israel, but this is not a local Israeli phenomenon. For example, home prices in the US rose by 10% in the first half of 2022 alone, but have since fallen by 5%. The Central Bureau of Statistics reported this week that construction began on some 12,62 homes in the 480 months to March, a decline of 10.4 per cent compared with the previous 12 months. It should be remembered, however, that the number of apartments under active construction was nevertheless 2 per cent higher in the first quarter of the year compared to the last quarter last year.
Ronen Menachem,
"But even laxity in building starts is not a local phenomenon. The Eurozone Bureau of Statistics recently released another figure, showing a nearly 5 per cent drop in building permits in 2022 compared to 2021. This was a change of direction from 2021, when the number of permits increased by 15 per cent due to the recovery from Covid-<>. A decline in building permits is a negative indicator of building starts and does not bode well for a prolonged and consistent decline in home prices.
"The housing market in Israel does not behave substantially differently from trends in housing markets abroad. True, the population growth rate here is higher (certainly after the recent wave of immigration) and therefore the natural and ongoing demand for housing is higher. But the objective difficulties I have described here affect many countries around the world, and do not seem likely to dissipate in the near future. In the US, there has been a recovery in home prices in the past month or two, and here, too, the possibility of waves of declines and increases cannot be ruled out, while the market seeks equilibrium.
"The bottom line, judging by the behavior of housing markets in advanced economies, appears to be that the moderation in recent home price increases is likely to continue, in the short term, among other things in view of the marked increases that have existed so far in home prices, interest rates, mortgages, and inflation. However, in the medium term, domestic demand for apartments is strong. Therefore, if and to the extent that inflation is halted and there are expectations of a decline in the interest rate, it is expected to recover. In such a case, without supply-side adjustments, it is possible that price increases will resume.
"Subsequently, because I believe that the interest rate will not decline to the low levels that preceded the last wave of increases, it is reasonable to assume that even if housing prices rise again, their rate of increase will be slower than what we have experienced in recent years," Menachem concludes.
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