The International Monetary Fund warned that property prices in Israel are unnaturally high and that values could come tumbling down, harming the economy.
In its annual report on the country, released on Wednesday, the IMF said that high demand and low supply has driven up apartment prices to 25% above their real value.
“Against the backdrop of low interest rates and supply shortages, house price increases have been rampant,” the IMF said, and noted that housing prices have jumped 80% since 2007.
Unique aspects of the market in Israel have caused household formation to exceed the rate at which homes are supplied, the report explained. This was brought on by a large population increase through immigration during the 20th century, constraints on land development, delays in building approval and the protracted process of obtaining building permit insurance.
As a result, price-to-income and price-to-rent ratios were found to be 26% and 22% above their long-term averages.
The IMF warned conditions mean that there is a 20% chance that the property bubble will burst, causing a decrease in private consumption and hurting economic growth. However, correcting the housing prices too quickly could also drive the economy into recession while a slow correction would diminish economic prospects for a prolonged period, the IMF cautioned.
Among the suggestions the IMF made was the possibility of establishing non-partisan councils to take over some of the roles of the Bank of Israel in laying down fiscal policies.