Just six months ago an investor could receive about 2% annual returns on leasing an apartment in Tel Aviv – let’s say NIS 6,700 a month rent on an apartment worth NIS 4 million. It looked like a paying proposition. As a solid investment option, it didn’t yield much. But the banks were offering mortgages at 1% rates (prime minus 0.6%) or linked to inflation, which had been in negative territory for the past five to 10 years. And of course in Tel Aviv, there was “permanent demand and no supply.”
Then the era of cheap money ended. Interest rates and inflation began rising quickly and the oxygen supporting the market suddenly thinned out, and the result, as Swiss bank UBS points out in its Global Real Estate Bubble Index 2022, which was published yesterday, is that the Tel Aviv housing market, as in many cities around the world, is looking risky, including the ultimate threat, the development of a ‘bubble.’
Investors can now obtain 3% returns on their bank deposits, without any risk. Those not owning an apartment understand that a mortgage, linked to prime or the Consumer Price Index, now has repayments costing hundreds of thousands of shekels more. Even tech employees are more concerned about a slowdown and the difficulties of servicing large debt.
Moreover, the argument that there is ‘no supply’ suddenly no longer seems to hold water. Tel Aviv is one huge urban renewal building site with denser, high-rise construction the order of the day, while in north Tel Aviv there are still land reserves for tens of thousands of new apartments.
A question of trusting the government
Only recently the Central Bureau of Statistics published data about building starts for the 12 months ending June 2022. Tel Aviv was top of the list with 5,432 building starts. How many Israelis without an apartment or investors will be able to, or want to, pay the current prices in Tel Aviv?
Despite everything, there is no certainty that housing prices in Tel Aviv are set for a historic correction. It is mainly a question of trust in the government, which has been unable to provide a housing supply over the years. Nevertheless, the risk that it will happen, as UBS warns, has reached a peak.
Published by Globes, Israel business news – en.globes.co.il – on October 13, 2022.
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