A bubble? (Illustration)
Photo: Index Open
Experts: Beware realty bubble
Real Estate Appraisers Association warns heightened activity by property acquisition groups inflates apartment prices, causes buyers to 'unwittingly take enormous risks'
Housing prices in Israel have risen some 24% in 2009, despite the financial crisis and the recession.
"Apartments in Israel are overpriced compared to their actual market value," Housing and Construction Minister Ariel Atias told Yedioth Ahronoth's economic supplement on Monday.
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Housing prices, he added, "will not stay like this forever. Eventually, everyone will understand that they don't want to extend their financial ability – it makes no sense."
Industry insiders say that the sector's "soft belly" lies with real estate acquisition groups, which seem to have taken over the market not only in central Israel, but in the periphery as well; causing realty prices in cities like Bat Yam, Petah Tikva and Be'er Ya'akov, for example, to nearly triple.
"People who buy flats through these groups are unwittingly taking an enormous risk," warned Erez Cohen, head of The Real Estate Appraisers Association in Israel (REAA).
According to the Treasury's State Revenue Administration, realty acquisition groups bought NIS 870 million-worth of land in central Israel in 2008, compared to only NIS 250 million bought by contractors (approximately $233 and $67 millions worth respectively).
Bubbles are destined to burst
REAA analysis indicates that in many of the "hotspots" – cities the likes of Tel Aviv, Petah Tikva, Ramat Gan, Givatayim and Bat Yam – land prices fail to reflect actual property value, and in many cases buyers will have to pay up to 20% more than what they would expect for those areas.People who choose the acquisition group avenue, added Cohen, fail to take into account that in most cases, buying an apartment entails committing to a 20-year mortgage.
"Israel's real estate history proves that apartment prices drop whenever there is an increase in interest rates, as does the demand," said Cohen.
"Israel has a real estate bubble, and like any other, this bubble is destined to burst,' Tamir Fishman, co-founder of Gaia Real Estate and Tamir Fishman & Co., added.
"World recession deflated pay levels and realty prices around the world, but in Israel realty prices have gone up, while wages have gone down. The average Israeli now has to invest the equivalent of 68 work months in order to buy an apartment, while two years ago, 56 months-worth would have sufficed."
The situation, he added, may cause an increase in the number of people who default on their mortgage payments and in its worse, may bring about a subprime-like crisis.
The US economy is still reeling from its subprime mortgage crisis, which first sent ripples through its economy in late 2007. The crisis was triggered by a dramatic rise in mortgage delinquencies and foreclosures.
