OECD warns Israel’s housing bubble could pop, predicts continued economic growth

Survey urges government to increase spending on infrastructure, education to alleviate poverty of ultra-Orthodox and Israeli Arabs

Simona Weinglass is an investigative reporter at The Times of Israel.

A construction site for new apartment buildings in Beit Shemesh photographed on February 21, 2017. (Yaakov Lederman/Flash90)
A construction site for new apartment buildings in Beit Shemesh photographed on February 21, 2017. (Yaakov Lederman/Flash90)

The international economic group OECD warned that Israel’s housing bubble could see a “severe” correction in the coming year, but predicted continued high growth for the Jewish state in its annual Economic Survey on Sunday.

The survey, which was presented in Jerusalem by the Organisation for Economic Co-operation and Development’s acting chief economist Alvaro Pereira; Shai Babad, director general of Israel’s Finance Ministry; and Yoel Naveh, Israel’s chief economist, described the performance of the Israeli economy as “remarkable,” with an average annual growth of 3.3 percent since 2012, low unemployment and strong macroeconomic policy.

Finance Minister Moshe Kahlon (left) with OECD Acting Chief Economist Alvaro Pereira, March 11, 2018 (Finance Ministry Spokesperson’s Office)

“The Israeli economy has grown faster and more consistently than nearly any other in the OECD for the past 15 years,” Pereira said. “Unemployment is at historically low levels, and the rise in people with jobs has had a significant impact on the continuing convergence of living standards in Israel with those in the most advanced economies.”

At the same time, the survey pointed to several weak points in the Israeli economy that the government should address if it the country seeks to maintain its trajectory of growth, including the floor being pulled out from under high housing prices.

The survey’s authors said there was a high chance of a “severe” correction in housing prices, which could adversely affect the economy as a whole.

“If house prices were to fall sharply, reversing some of the appreciation of the last decade, private consumption would suffer because of a wealth effect. That would lead to adverse effects on the labour market, which would harm borrowers’ ability to service their mortgage debts and potentially entail a further house price decline,” the authors wrote.

Israeli has seen skyrocketing housing prices over the past 15 years, which the government has attempted to rein in while keeping the real estate market from experiencing a sudden steep drop. While analysts have pointed to a leveling off of prices in recent years, some still fear the market could pop, leading to a recession.

The report also found that poverty remains high, especially among the ultra-Orthodox and Israeli Arabs, who will constitute half the population by 2060.

“Given the high fertility of Haredi women, which is assumed to remain largely unchanged, the share of that community in the total population would triple in the next 45 to 50 years, with the total share of Israeli-Arabs and Haredim rising from one-third to one-half over this period.”

The survey pointed to relatively low Israeli scores on the OECD’s student assessment PISA tests and poor financing of education and infrastructure as indicative of threats to Israel’s future prosperity, suggesting that improved tax collection could help address these problems.

“Weak public spending on education and infrastructure limits the government’s capacity to reduce significant socio-economic disparities and support growth. Extra spending needs to be financed. Tax collection could be improved, and there are a number of inefficient tax exemptions,” read the report.

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