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Worlds best performing real estate market raises interest rates over inflation worries

Although located in one of the world’s most volatile regions, Israel has defied the worldwide real estate slump because of a dearth of land available for development and tax breaks for investors.

Prices rose 12.5% in the second quarter from a year earlier, double the increase for Switzerland, the second best performer among countries tracked by London-based property consultants Knight Frank.
However, fears about a real estate bubble have prompted the Bank of Israel to raise interest rates to combat rising inflation.

The rate was increased to 0.75% in August.

But the market is concerned that higher borrowing costs will dampen demand for mortgages and lead to a drop in property prices by the middle of next year.

Shlomo Maoz, chief economist at Excellence Investments in Tel Aviv, believes further rises are on the cards.

‘A bubble began to emerge this year, fueled by the Bank of Israel.

The bank is now beginning to raise rates again to fight inflation,’ he said.

Some economists are predicting that interest rates will go up to 2.5%.

‘Mortgages will suddenly become a major burden on people.

We see a decline in property prices in 2010 or at least a fall in the pace of growth of house purchases,’ said Ori Freenfold, an economist at Psagot Investment House.

But as Israel never experienced a credit boom similar to the US or the UK, so the country is unlikely to experience a real estate slump, according to some.

Prices will probably ‘stabilize’ rather than plunge, said Ayelet Nir, chief economist at IBI Ltd.

Prices in some locations in Jerusalem, Tel Aviv and the coastal city of Netanya are likely to remain high due to a constant demand from Jews from the US, France and the UK, according to Bernard Raskin, regional director of Re/Max Israel, the country’s largest property broker.
Mortgage rates are currently about 2%, according to lender Mortgage Israel, the country’s largest home loan brokerage.

The average rate for the past five years was about 5%. So many investors have put their money into property rather than rely on poor interest rates from the banks.

Also the government controls 95% of Israel’s land and has consistently restricted the amount available for developments.

The restrictions on land purchases contributed to a drop in the number of apartments on the market to 7,779 at the end of July, the lowest in at least four years, according to figures from the Central Bureau of Statistics, down from 10,325 a year earlier.
A new law aimed at increasing the amount of development could push property prices down as more stock comes onto the market. It will free up publicly owned land for private development and make it easier and cheaper to buy and build homes.