An Analysis and Comparison of the Present Tel-Aviv Real-Estate Market to that of 2008
“The best prophet of the future is the past.”- Lord Byron
“History provides no precise guidelines.”- Douglas Hurd
COVID-19 has created an immense amount of difficulty, pain, and hardship. There are a plethora of families who are grieving the loss of loved ones, while others are anxious about relaxing social distancing protocols for fear that they or their loved ones may contract the disease. Many families are worried about their immediate future, dwindling resources, and a terrible job market. With the approximate unemployment rates of 24.1% in Israel, 16% in the USA and 25% in the UK, it sometimes seems that we are one piece of bad news away from a worldwide economic depression. Given these realities, it would seem to be the wrong time to entertain a discussion about potential real estate investment in the Tel-Aviv Real-Estate Market (TAREM).
Yet recent history, which according to Lord Byron is the best prophet of the future, suggests that this may actually be a propitious time to invest in the TAREM. During the two-year period of the World Financial Crisis (WFC) from Q1-2008 to Q4-2009, average residential real estate prices rose approximately 42% in Tel-Aviv, while average real-estate prices fell approximately 25% in the USA. Consequently, review of the market climate of the 2008/9 TAREM, and an analysis of whether those factors are still relevant would be an important guide to see if the past will (once again) be a prophecy for the immediate future.
The top three reasons that are given for the surprising jump in prices in 2008/9 TAREM are:
Stability of the Israeli Banking System (IBS)- Capitalization requirements for mortgages in Israel far exceeded that which was required in other banking systems. Consequently, Israel’s banking system was never placed into stress, and Israel became somewhat of a magnet for investors who sold stock portfolios and were looking for a growth opportunity. The dynamic of the IBS’s high capitalization requirements is still relevant in 2020.
Inherent Dynamics of the Israeli Real Estate Market- The combination of positive internal population growth, worldwide immigration to Israel, international interest/demand for housing and a slow bureaucratic process for construction approvals, created a situation where the real estate market could meet the demand for property. At the risk of being overly simplistic, this dynamic still very much exists in 2020.
Low-Interest Rates- The Bank of Israel dramatically lowered interest rates during 2008/2009, creating a higher demand for mortgages. This market factor is maybe even more relevant, as the Bank of Israel recently lowered its overnight interest rates to .1%.
While the three key components for the 2008/9 rise still presently exist, it is important to note that there are some key differences between the present situation and 2008/2009.
FATCA- is an acronym for the Foreign Account Tax Compliance Act. Under FATCA, Israeli banks are required to do due diligence on U.S clients and disclose the identities of U.S. citizens and the value of their assets held in their banks. The effects of FATCA and Israeli laws placing limits for cash transactions have made a significant impact, as Israeli banks have become very selective in who they accept as international customers.
Increase in Purchase Taxes- another key difference between 2008 and 2020 is the change in real estate purchase tax for both Israelis and non-Israelis. In certain circumstances, the increase in purchase tax is almost double what it was in 2008.
Change in the Real Estate Market- The TAREM has nearly doubled since 2008, and some market factors which existed in 2008 don’t exist today. Additionally, the government has embarked on an aggressive program of effectively undercutting the broader Israel Real-Estate Market, by subsidizing the cost of first time home purchases.
What is surprising is that while the aforementioned market changes have been in force for the past couple of years, they have failed to lower prices. Although 2018 housing prices fell in the TAREM by approximately 3%, they rebounded in 2019 rising 5.7%, approximately double the national average in Israel for the year.
Although the data seems to point towards a repeat of the TAREM’s rise, it is important to remember that COVID-19 is bringing with it very unique difficulties and challenges. No one can predict if there will be a second wave and what the effects would be. As one international currency trader told me, “I don’t think that this is a normal crisis, with normal answers”.
While one can not minimize the potential risks of an investment in the shadow of COVID-19, there are two other factors that point towards the continued growth of the TAREM and should be considered when making an investment decision.
“Nimbleness” of Israeli Entrepreneurs Especially in Hi-Tech- “Start-up Nation’s” entrepreneurs focus primarily on international markets and have a “nimbleness” to quickly shift towards areas, countries, and situations where there is emerging opportunity. While I hope and pray that the world will recover quickly from the effects of COVID-19, a worldwide “nimbleness” gives Israel an objective advantage in her ability to continue to grow in the aftermath of COVID-19.
“Call the Israelis”- in international business there is a truism that in situations of distress, one simply “calls the Israelis”. Israel has navigated and grown through wars, intifadas, hyperinflation, currency devaluations, etc. and has emerged as a viable economic force as the Shekel is one of the world’s strongest currencies. Israel’s reputation as a “go-to” resource in complex situations gives Israel another objective advantage in her ability to grow and attract investment in the aftermath of COVID-19.
The “nimbleness” and “call the Israelis'' phenomenon has brought a lot of foreign attention, capital, and investment to the Tel-Aviv area. In 2016 direct foreign investment in Israel totaled 107.5 billion dollars. The number rose to 129 billion dollars in 2017, and in 2019 the amount of direct foreign investment in Israel was approximately 200 billion dollars.
These figures become more surprising when one considers that in 2008, there was relatively no direct foreign investment in Israel.
The infusion of all this focus and foreign capital has ensured that the TAREM would maintain the gains that it made during the past 12 years and continue to grow. With Israel’s speed in recovering from COVID-19 to date, there is a strong probability that even more foreign capital will enter into Tel-Aviv, flow into the TAREM, and cause it to rise.
Although history provides no precise guidelines for the unique challenges of COVID-19, do not be surprised if in 12 years that we'll be reading about the repeated rise of the TAREM in 2020.
The contents of this article are designed to provide the reader with general information and not to serve as professional advice. Readers are advised to obtain specific advice from qualified professionals prior to entering into any specific transaction.