Call it a price bubble, or the result of over-regulation – but home costs in Israel are heading higher, according to some of the top real estate professionals in Israel and the US.
“For many Israelis, real estate is a first-line investment, where they have most of their savings tied up,” according to Mody Kidon, president of Alto Real Estate Investments, which specializes in developing properties in “second tier” cities in the US – growing communities outside of New York and Los Angeles. “The government can’t afford to allow prices to sink too low.”
Kidon predicted that Kulanu party head Moshe Kahlon, who says he is the man to lower housing costs – just like he did with cellular phone rates – is likely to find out the hard way that there is little he can do. “He is fighting against forces much greater than he,” said Kidon. “I wish him luck, but the issues here are structural, and they are not necessarily under the control of the entire government, much less the finance minister.”
Prime Minister Benjamin Netanyahu has promise Kahlon the post of finance minister in the government he is now cobbling together.
Kidon was speaking on the sidelines of a real estate investment forum featuring some of the top moguls in the business, sponsored by multinational law firm DLA Piper, a firm with more than 4,200 lawyers in 30 countries. Panelists at the event – the 3rd Annual Global Real Estate Conference, which was held in Tel Aviv last week – said that some 60% of the price of property in Israel consisted of either taxes or payments to government agencies, like the Israel Lands Administration.
Among the panelists at the event were some of the biggest names in real estate in the US, the UK, Israel, and central Europe, including Shawn Rosenthal, Executive Vice President Debt & Structured Finance, CBRE Capital Markets; Gabi Stein, Managing Director, Tishman Speyer Properties; Tal Kerret, President, Silverstein Properties; Benjamin Singer – Director, European Expansion, WeWork; Adam Irányi, Senior Investment Manager, Union Investment Real Estate; Allen Chilten, Senior Manager, Rockspring Property Investment Managers; Jay Zwiebel, Executive Managing Director, Harbor Group International; and Kidon.
Much has been written about Israel’s premium real estate market, where prices for a basic four-room apartment even outside the in-demand areas of the Tel Aviv and Jerusalem metropolitan areas start at more than a million shekels, about $250,000 (“starter” homes in the Tel Aviv and Jerusalem areas start at double that). According to a study by The Economist magazine released last week, home prices in Israel have climbed over 87% since 2008. Theoretically, those prices could be slashed in half, said Kidon, but don’t count on it; doing so would require slashing significant amounts of bureaucracy, and it’s likely that even if home prices fell due to bureaucratic reform, they would jump right back up because of demand.
Israel, it turns out, is a victim not only of its own bureaucracy, but of the asset run-up the rest of the world is experiencing. Panelists at the DLA Piper event focused on, among other things, the question of “the bubble” – as in, are real estate prices high because of mindless bidding up of prices by speculators, or because the properties that increase in price daily, especially in the world’s most in-demand locations like London, New York, Hong Kong, and other select cities, are really “worth it.”
The answer is yes and no. There are two factors feeding the real estate price frenzy, according to Union Investment Real Estate’s Adam Iranyi, a top executive at the biggest German real estate fund. “The bottom line is that there is too much money and too little product,” he said in the event’s keynote address. “There is a huge amount of new participants in the market who are driving up prices, many of them from Asia, and the high-net worth buyers from Europe and the US are also buying more.”
With interest rates next to nothing, financing is a breeze, and with real estate a proven investment winner – and with investors able to yield between 4% and 6% from rents on purchases – there is no reason not to keep buying, Iranyi added.
As an investor, Kidon looks at growing cities in the US for good investment opportunities. Kidon, who started his fund five years ago, owns more than $500 million in income-producing property in the “second-tier” – smaller but robust cities outside the major metropolitan areas in the US – but he lives in Israel and manages his investments from his Tel Aviv office. “Cities like San Francisco, Austin, Salt Lake City, Houston, Provo, Denver, and others are relatively reasonably priced for residential and commercial real estate, and are among the top ten cities for growth in the US. Those are the areas we like.”
Kidon himself is suspicious that a bubble is afoot – that prices could tumble in the blink of an eye if interest rates shoot up. But that is very unlikely to happen.
“The governments learned their lesson from the 2008 recession,” said Kidon. The background to that crisis, of course, was the anything-goes unraveling of the US mortgage market that saw homebuyers acquiring properties that they couldn’t afford and taking out mortgages they couldn’t afford to pay back. But the actual recession was initiated when the US government refused to bail out the bankrupt Bear Stearns investment firm, which led to a chain reaction of Wall Street failures, culminating with the near-bankruptcy of multi-billion dollar insurance and investment firm AIG.
That scenario is unlikely to repeat itself on any level, said Kidon – and that includes a shock to interest rate levels. “The best they can do is gradually – very gradually – increase interest rates, but if that ever does happen, it will be done only when the market is ready for it. And even if they do, they cannot afford to let prices sink too low. Too many people have their retirement savings tied up in their homes, and too many people owe mortgage money to the banks.”
If prices go down, demand will dry up, and people might even walk away from expensive properties, forcing the bank to foreclose – and the Israeli economy, resilient as it is, can’t afford an American-style 2008 bank meltdown.
Indeed, an interest rate increase is likely to be the only thing that tempers demand for housing, but Israeli interest rates aren’t likely to rise as long as US interest rates stay low. “You can’t fight the Fed, and that goes for governments, too,” said Kidon. “We’ve already had a scenario where Israeli interest rates were higher than the Federal Reserve’s, and all that did was bring more foreign investors here, causing a too-high valuation of the shekel that made Israeli exports expensive. Israel is now part of the race to the bottom of the interest rate pile,” and as a result, demand is going to remain high. “I’m afraid that anyone who is looking to prospective Finance Minister Moshe Kahlon [to lower housing costs] is going to be disappointed. There’s not that much he can do.”