20/2/12
The drop in prices reported by the government assessor, a 1% fall in the fourth quarter, following a 1.2% fall in the previous quarter (which means something like a NIS 20,000 drop in the price of an average apartment in six months), reflects the most stagnant, most social-protest affected, and most buyers'-market half year that the real estate market has known in recent years, and restores some proportion to the expectations that any minute any young person would be able to buy a home at a reasonable price.
A few weeks ago, Bank Hapoalim chief economist Leo Leiderman predicted that home prices would fall by single digits. "Prices in the real estate industry have never fallen by double digits," he said.
Leiderman is right. In the past 20 years, the greatest drop in home prices (in real terms) was in 2003 - a year in which more than 100 Israelis were murdered in suicide bombings - when prices fell by 5.9%. In nominal terms, the highest drop in prices was also in 2003, at 5%.
The fence on which "everyone" sits
Why is this happening, after we were told through out last six months of 2011 that home prices were falling, and would continue to fall, that all the young couples were sitting on the fence, that investors had quit the market, that the market was full of apartments for sale, that foreign investors have their own troubles, and that the banks were not as generous as before?
The main reason, the classic reason, is the fact that there is no real price tag for an apartment. Despite everyone's efforts to tell us the precise price for an apartment, no two apartments are exactly alike. Even in the case of two apartments in the same neighborhood, even in the same building - the area is different, the floor is different, the direction of the windows is different, or the standards and design are different, and so on.
It follows that, there is no clear value fixed in any market that, at the end of the day, clearly sets the new price for the start of the next day. Therefore, each individual can justifiably feel that nothing has happened, and that his apartment is still worth yesterday's price, especially if he isn't under pressure to sell and he has no other investment options.
Consequently, and in contrast to the securities market, where people aren’t in a hurry to sell at a loss either, in the case of a home, the denial is even stronger. You will not find people giving their real estate agents an order to sell their home at the end of the day "for the price you can get", as many people do when they decide to dump their stock portfolio.
In addition, it should be remembered that after contractors jump on the bandwagon to buy land during the boom, it takes years for the newly-built apartments to reach the market and change the supply-demand equation.
Hard to accelerate on the slope
There is another side of the coin, however. Close attention should be paid to recent remarks by Prof. Robert Shiller of Yale University, the co-founder of the Case-Shiller Home Prices Index. At the World Economic Forum in Davos last month, he told "Business Insider" CEO and editor in chief Henry Blodget what affects home prices even more than the interest rate and housing inventory.
"I think historically, if you look at it, interest rates don't seem to matter very much in determining home prices. In terms of forecasting, which you're asking me to do, to forecast the change, the big thing in forecasting home prices is momentum. It's different than the stock market. So if it's been going up it will continue going up and if it's been going down it will continue going down. By that model, which is the most successful forecasting model for home prices, prices will keep going down."
In other words, falls take time to gather momentum, but when they do, it is very hard to stop. That is the power of momentum, for better or worse. Historically, anyone looking for volatility and cycles in the housing marketing will have to look at a graph marked in decades. In 1998-2007, prices fell slowly and steadily for ten straight years (in real terms), for a total drop of 22%.
The many housing starts, the measures by the government and the Bank of Israel, and most of all, the change in the public's mind, are processes that take a long time to mature, but are then very hard to stop.
Do falling prices for two quarters constitute momentum that might last for ten years? Unfortunately, we will only know in retrospect. As Shiller told Blodget, and apropos of the latest report by the Government Assessor, "That's the fundamental problem of economics. We'd like to be statisticians but in fact the world is always changing on us. So we end up having to use judgment. We're not very good at that."
Published by Globes [online], Israel business news - www.globes-online.com - on February 20, 2012
23 January 2012
The Bank of Israel has cut the interest rate by 25 basis points from 2.75% to 2.5%. Although the Bank of Israel left the interest rate unchanged last month, it had cut the rate twice in the second half of 2011, each time by 25 basis points, once at the end of November and before that at the end of September.
The cut was a minor surprise because in a "Bloomberg" poll over the weekend,11 out of 19 analysts expected no cut, while the minority of eight experts had predicted the 25 basis points cut.
In explaining the reasons for the cut, the Bank of Israel said, " The decision to reduce the interest rate to 2.5% for February 2012 is consistent with the interest rate policy that is intended to entrench the inflation rate within the price stability target of 1-3% inflation a year over the next twelve months, and to support growth while maintaining financial stability."
The Bank of Israel added that the main considerations in the decision were, "the slowdown in growth of Israel's economy as seen in exports and in domestic demand, against the background of weakness in the global economy and the significant uncertainty existing in the global environment, primarily around Europe. In addition, surveys of expectations, both of consumers and companies, show that the slowdown in the rate of growth is expected to continue."
While the Bank of Israel expects inflation to remain within the government's target range, it is concerned about developments in Europe. The Bank said, "Data on economic activity in Europe are consistent with the assessments that the eurozone will slip into a recession in 2012. Figures of actual global trade show a continued volume decline in October. Forecasts for world trade growth in 2012 were revised downward. The risk of default of some European countries as reflected by the high yields on their bonds and their high CDS spreads were expressed this month in the downgrading of the sovereign credit rating of major European economies. Some optimism has been evident recently in global financial markets, primarily against the background of steps taken by the ECB, but uncertainty regarding the debt crisis remains high, which also affects the level of uncertainty about developments in the Israeli economy."
The Bank of Israel does not see the US Federal Reserve, the European Central Bank or the Bank of England raises interest rates above their near-zero levels before mid-2013.
Looking at the real estate market, the Bank of Israel said, "Home prices continued to decline at a moderate pace. The limitation that the Bank of Israel imposed relating to the permitted share of housing loans at floating interest rates reduces the effect of cuts in the Bank of Israel interest rates on the average interest rate on mortgages."
Published by Globes, Israel business news - www.globes-online.com - on January 23, 2012
