Tel Aviv’s red-hot housing market a ‘bubble risk,’ warns global banking firm

International investment banking and wealth management firm UBS anticipates a serious shock to global housing prices, with Tel Aviv among the cities it identifies as vulnerable.

The Swiss firm’s annual Global Real Estate Bubble Index report for 2022 says recent shocks to financial markets, rising interest rates and inflation are set to hit housing prices, leading either to a period of stagnation — that is, of no further increase in prices — or, in the most extreme case, falling valuations.

In Tel Aviv, the most expensive city in the world, property prices and rental rates have been climbing steadily.

UBS’ report evaluates cities’ housing markets across the world based on sub-indices such as affordability (price-to-income), rental prices, mortgage rates changes and construction activity, dividing them into groups: those that UBS research assesses as having fair property valuations, those that appear overpriced, and those that, it believes, are so over-valued that there is a risk of a market correction.

Each city is given a score between below -1.5 (an undervalued market) and above 1.5 (a bubble risk).

Tel Aviv came in at 1.59, toward the bottom of the list of cities in the risk zone which also included Tokyo, Munich, Zurich, Frankfurt and Vancouver, with Toronto topping the index (with a score of 2.24). This year’s report marks the first time that Tel Aviv has been listed as a “bubble risk” in the eight years that UBS has compiled the index.

UBS defines a housing bubble as “a substantial and sustained mis-pricing of an asset, the existence of which cannot be proved unless it bursts.” This means that it is impossible to know whether price drops are around the corner until properties begin declining in value to attract buyers.

A general view of buildings in central Tel Aviv, on December 2, 2021. (Tomer Neuberg/Flash90)

UBS says that typical signs to indicate bubble conditions in a housing market — many of which clearly apply to Tel Aviv — include “a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity.”

For cities at risk, housing prices over the last decade have risen by at least 60 percent while average wages have gone up by around 12%. The latest figures from Israel’s Central Bureau for Statistics suggest that in Tel Aviv, the average price for an apartment is now more than NIS 4,000,000 ($1,234,777), while average wages were NIS 11,753 ($3,514) in May and NIS 26,828 ($8,019) for those in tech, with a string of layoffs in the sector over recent months.

In Tel Aviv, UBS estimates that a skilled worker now needs to work at least 11 years to be able to buy an 80 square meter (861 square feet) apartment near the city center. This puts Tel Aviv in the top five least affordable cities for its population. The city also ranks very highly on the price-to-rent scale: UBS calculates that it would take over 40 years for rental payments to cover the price of a property, confirming the fact that rental returns in Tel Aviv, despite rapid increases, remain relatively low compared to the costs of purchase.

“Nominal house prices in Tel Aviv have roughly tripled between 2001 and 2017. Rents almost kept pace with the price increases, reflecting a fundamental housing shortage,” the report read.

A view of a junction on Allenby Street in Tel Aviv. (rglinsky via iStock by Getty Images)

UBS says that starting in 2019, Tel Aviv’s housing market saw another “explosive phase of price growth.” Between mid-2021 and mid-2022 alone, housing prices rose at an annual rate of 17.8%, the fastest in a decade, and “outstanding loan volumes shot up by 18% as well, the fastest pace in 25 years.”

The report notes an ongoing debate around relaxing the loan-to-value ratio could potentially push prices up even faster. At the moment, mortgage borrowing is capped at 75% of the value of a first home, which together with monthly payments limited to 33% of net household salary, act as brakes on price growth and protect lenders against the risks of housing deflation.

However, UBS said, “the probability of a sharp but short-lived correction is high if mortgage rates rise further.” The Bank of Israel raised the benchmark interest rate to 2.75% earlier this month, its fifth’s rate jump so far in 2022.

Los Angeles, New York, San Francisco, London, Paris, and Singapore scored in the “overvalued” zone, according to the index, while Dubai, Milan, Sao Paolo, and Warsaw were among the cities with a “fair-valued” housing market.