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Israel’s Response to the Real Estate Boom

Background

In my last column we discussed the escalating prices for housing in Israel over the past few years, in marked contrast to the global real estate slump. I offered several explanations: (1) Israeli banks never participated in the discredited subprime lending practices; (2) the unemployment rate never rose as high as overseas; (3) the relatively small inventory of new homes; and (4) the availability of low interest mortgage rates.

Government Response

Let’s now focus on how the Israeli government is trying to prevent pricing from escalating to the point of creating a housing bubble with all its attendant risks.

The Bank of Israel, under the leadership of Stanley Fischer, is insisting that banks require a higher equity ratio on large (over 800,000 shekel) loans. Buyers will be forced to put down 40% equity and only receive a 60% mortgage, as opposed to the past when they could easily receive 70% financing. The Bank of Israel anticipates that this measure will help reduce pricing by up to 15% over the next twelve months. People in the know think that this is an unrealistic expectation in cities like Jerusalem and Tel Aviv, but are encouraged that it will have a moderating effect.

In addition, Prime Minister Netanyahu is implementing rules lowering taxes for builders and granting bonuses to contractors who build projects more quickly. Whether Netanyahu’s actions help to expand housing supply and cause lower market pricing is open to debate, but at the very least it is a first step in addressing the housing shortage.

Implications for Overseas Buyers

These new rules are a mixed bag for you, the overseas buyer. Obviously, the 40% down payment requirement may limit what you can afford to buy. On the other hand, the government’s proactive stance to induce lower pricing will hopefully limit the spiraling price of apartments. 

2011-01-04 21:23:00



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