Interest rate rises failing to cool Israel property market amid bubble fears

More famous for its war with Palestine than its real estate market, Israel is, however, getting worried about a property bubble and interest rates are set to rise again to cool the sector.

The country has seen six interest rate raises in just over a year and so far they have not dampened demand. Economists believe that if prices continue to rise at the current pace the real estate market will start to bubble.
Experts point out that banks in Israel have avoided a US style subprime mortgage crisis and its financial market is not intertwined with the mortgage market. Down payment requirements for buying are high, often equal to more than 40% of a property’s value.
As real estate markets around the world stalled and ground to a halt Israel has seen a 30% jump in prices since September 2008. This increase has been fuelled by a lack of supply, one factor that is, ironically, preventing the peace process because of the drive to build new homes, many on land claimed by Palestine.
This all happened at a time of rock bottom interest rates but even now that interest rates have risen there appears to be no let up.
According to Vered Dar, chief economist at the Psagot-Ofek investment house in Tel Aviv, property supply was ‘thrown out of whack’ by the mass immigration of some one million immigrants from the Soviet Union 20 years ago. Housing starts surged excessively in the ensuing years, leaving contractors and the government struggling to find a balance. Over the past five to six years not enough houses have been built, she added.
A three bedroom apartment in Tel Aviv costs around 2.15 million shekels, or $560,000, compared with 1.73 million shekels a year earlier, according to government statistics.
The price of an average apartment in Jerusalem, with its holy sites and mixture of ancient and new, increased 19% to 1.55 million shekels, or $403,000, at the end of June from 1.31 million shekels a year earlier.
The central bank’s efforts to rein in prices with interest rate hikes have provoked government resistance, with the Finance Ministry worried that it could hurt the economy by strengthening the shekel against world currencies and battering the vital export-oriented high-tech industry.
Skylines are dotted with cranes and half built high rise blocks and the government run Israel Lands Administration is working to free up more land for construction but still demand rises. Housing starts were up more than 20% in the second quarter of 2010 from the first three months of the year. Finance Minister Yuval Steinitz recently told a business conference that it would take up to two years to solve the supply-side problem.