Excerpt from the Bank of Israel Annual Report which will be published at the end of the month: Main Developments in the Investment Housing Market in Recent Years

05.03.2012

Excerpt from the Bank of Israel Annual Report which will be published at the end of the month: Main Developments in the Investment Housing Market in Recent Years

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	The proportion of dwellings purchased for investment purposes peaked in 2009 at 31% of all dwellings bought.
	In recent years, investors have been focusing on the Beersheva and Haifa areas, where the return on investment dwellings has risen considerably relative to that on dwellings in Jerusalem and Tel Aviv, formerly the investors’ favorite cities.
	Investors’ income is 40% above the national average wage and the price of the dwellings that they buy is 33% below that of the average dwelling.
	Against this backdrop, only about half of buyers of investment dwellings need mortgage loans to finance their acquisitions, and the loans that they do take are smaller than those taken by purchasers of dwellings for residential purposes.
	Along with the effect of the increase in the real Bank of Israel interest rate (the Bank of Israel interest rate net of inflation expectations for the coming year) at the end of 2010 and during 2011 on the reduction of overall home purchases, other factor

The number of dwellings purchased for investment and the share of such purchases in all home-buying increased during most of the past decade, peaked in 2009–2010, and fell steeply in 2011. The increase in recent years was affected by developments surrounding the financial crisis, including falling returns on fixed income investment vehicles and a major upturn in the riskiness of other assets. Concurrently, the average return on a dwelling, calculated as its annual rent divided by its price, was 4.5% per year in each of the years between 2006 and 2008 and even more in certain parts of the country. Thus, the increase in the proportion of dwellings acquired for investment was accompanied by a change in the geographic trend: Tel Aviv and Jerusalem lost their primacy as investors’ favorite destinations, a status that they had held until 2008, to the Beersheva and Haifa areas, where the return was much higher than it had been in the past.

The profile of housing investors in 2009 was much the same as in previous years in terms of income and available capital. The investors’ median income was 40% above the national average wage that year and the median price of an investment dwelling was NIS 600,000. Thus, the median price of an investment dwelling in terms of years of purchaser’s labor was also basically unchanged at 4.5 years in 2006–09, as against 9 years of labor for those buying dwellings for residential purposes in 2009. Due to the increase in housing prices, however, the value of an investment dwelling relative to that of an average dwelling fell from 80% in 2003–07 to 67% in 2009.

The economic resources available to buyers of investment dwellings and the relatively inexpensive dwellings that they buy are also reflected in the mortgage-loan market, assuming that the profile of investors in the past year resembles that in previous years. Thus, while 15,000 dwellings were acquired for investment in April–December 2011, only 7,600 mortgage loans were issued for such acquisitions during this time. In other words, only half the homes purchased for investment required a loan in order to pay for their acquisition, as against more than 90% of dwellings bought for residential purposes at the same time. Also, the mortgage loans that were taken by investors who needed them were 8.1% smaller than those taken by people who bought dwellings for residential purposes.

Against the background of these findings, one may analyze the effects of the policy measures that have been adopted in recent years to cope with the sharp increase in home prices. The limitations imposed by the Bank of Israel during the course of 2011 on mortgages were aimed primarily at reducing the risk inherent in a sharp increase in the monthly payment for those who take out floating rate mortgages, but they also made mortgages more expensive. As such, they had more effect among first time home borrowers, who have more need of a mortgage. In contrast, the increase in real-estate purchase tax on second dwellings, which came into effect in 2011, has served as a disincentive for the entire population of investment-home buyers, and therefore it had a greater impact than the limitations on mortgages. The increase in the real Bank of Israel interest rate in late 2010 and during 2011 (Figure 1) appears to have affected all homebuyers, both by making mortgage loans more expensive and by improving the return on fixed income investments.