26/11/2015Defining the problem of housing pricesWhen discussing the "real estate price problem," it's common to refer to two issues: a. The difficulty families (I don't like the term "young couple") have in purchasing their first residence, or in other words, a problematic ratio between Median income Between the average apartment price.B. Shortage of apartments causing price increases.With regard to the first point, let me use myself as a non-representative example: About a decade ago, I bought an apartment in Kiryat Ono (fourth floor, no elevator) for 400,000 shekels, or as apartments were priced back then—100,000$. The price of the apartment today is more than three times what it was, while the increase in the median wage during this period is far from threefold. Unfortunately, I was unable to find data on the median wage for previous years. In my opinion, the median wage provides a much better estimate than the average wage regarding the "affluence" (from the word “amid”) of Israeli citizens. However, even a review of the average wage shows that wage growth over the past decade has been much more modest than the rise in apartment prices: Source: Central Bureau of Statistics You can see that in 2005, the salary was 7,219, and in 2015, it was 9,145—an increase of 2,715—compared to a rise in apartment prices (based on my personal example) of over 3,001. So, it’s true that my example isn’t representative, especially given my habit of buying unusual apartments—or as my friends put it: apartments that sane people don’t live in—like a fourth-floor unit without an elevator. So, by how much did average apartment prices rise? Source: Globes In other words, on average, apartment prices have risen "only" twofold over the past decade, while wages have risen, as noted, by only 27%. This figure creates pressure, and it is certainly fair to say that it is becoming increasingly difficult to buy a home. I don’t like all the talk about whether or not there’s a "bubble." I don’t claim to "know" whether apartment prices are currently "right" or not. In my opinion, we can only know such things in the future, if there is indeed a sharp drop in prices. Optin ArchitectWhy do people keep buying apartments? A small confession, I studied economics in the exact same courses as the Ministry of Finance officials. In fact, my Israeli economics teacher was David Broadbent Who served as a lecturer concurrently with (or immediately after finishing) his tenure as Director-General of the Ministry of Finance, meaning someone who knows a thing or two about Israel's economy. Treasury officials have an easy life – they've been saying for years: prices will rise until the public stops buying apartments, and then contractors will be stuck with an inventory of apartments and lower prices. This is the classical supply and demand model, a model that every introductory economics student learns in macroeconomics. There's a tiny problem with the model – it's been failing for years in predicting consumer behavior regarding apartment purchases – as prices rise, demand increases. How?A change in product prices affects its demand according to Demand curve. The more the rising price affects the quantity purchased, the more elastic the demand curve is. The less the price affects demand, the more inelastic the demand is. For example, if the price of wood skyrockets and consequently, the prices of armchairs rise, I will postpone the purchase of a living room set until next year – this is elastic demand. On the other hand, if I am diabetic and the price of insulin skyrockets – I will continue to buy exactly the same amount (otherwise I will die) – this is an extreme example of inelastic demand. So why the hell is demand for apartments so tough, and what's the benefit of building more?"Apparently, the demand for apartments was supposed to be very elastic. For a product called a residential apartment, there is an excellent substitute – a rented apartment or complete avoidance of purchasing an apartment (in Israel, many apartments stand empty all year round, for example, thousands of apartments purchased by people from abroad). Why do people continue to buy apartments even in a way that seems completely illogical from the outside? I serve as the manager of the real estate forum on Tapuz. Many times I am exposed to apartment purchases that, on the face of it, seem (to me) completely illogical. For example:"Why would you buy? The chances of someone earning 15,000 affording a 1,300,000 mortgage are slim. What is going through their mind? What is going through the bank clerk's mind when they approve it?The answer is simple.People think prices will continue to rise. In my line of work, I talk to many new apartment buyers. To some of them I say: "Don't buy, you won't be able to pay the mortgage in a few years." Two answers repeat themselves:If we don't make the payments, we will sell in a few years at a higher price.What are our options? We save X shekels every month, but apartment prices are rising faster than we can save, and every year we "lose" a quarter of a room. Is it better to buy with our current down payment before it's not even enough for a smaller apartment?.And that is the heart of the problem – People believe prices will continue to rise. In such a situation, two opposing things happen:No matter how much prices rise, demand does not decrease People are concerned that it will be harder to buy in the future. Additionally, investors see prices rising and are trying to buy more and more. This is especially true for Jews from abroad who see Israel as a refuge on one hand, but suddenly also as an investment with a return that has been exceptional in recent years. Just to emphasize, I am absolutely not against investment by Jews from abroad. As a Zionist, I always remember that a refuge for the Jews of the world is the primary purpose of the State of Israel.Investors continue to enter the market where prices are constantly rising. In fact, when there is a belief that the prices of a product will always increase, then it will always have demand regardless of its price. For example, would you buy a flower seedling for 100 shekels? And if you knew that next week its price would be 120 shekels? In Holland in the 17th century, there was such a process which was known as Tulip Mania At the end, a tulip bulb was sold for a price equivalent to ten times an employee's annual income. In such a situation, even taxes on investors wouldn't help. Firstly, because the purchase continues to be worthwhile despite taxes, and secondly, because it's very easy to evade these tax payments. Several times this year, treasury officials have "wondered" how low-wage earners are buying apartments in Tel Aviv, and a word to the wise is sufficient.It's not worth it for contractors to build.. Let’s say that one-third of the apartment’s price is the cost of the land (which, of course, varies between downtown Tel Aviv and downtown Tiberias). A contractor bought land for construction. He sees land prices going up and up. Actually, why should he build if he can wait and sell for more money in two years? Maybe instead of taking the risk of building, marketing, and selling, he’ll just sell the land to another contractor for a 10% profit (per year) with no effort?Addressing the housing price problemIn my opinion, the best solution to the housing price problem isn't through slogans like 'unfreeze and build," etc. Of course, that also needs to be done, but I'm not a fan of shortcuts. Later, someone needs to live there. If the planning is rushed and as a result, natural values are harmed, for example, residents will suffer. We can see in many places the result of emergency construction in the fifties. People simply don't want to live in those "railway" neighborhoods built quickly. People need to live in an apartment, in a vibrant neighborhood, not in a "housing solution.".What can be done is to give citizens insurance against future increases in housing prices. We cannot prevent prices from rising or falling, but imagine a situation where the same citizen from the quote above, let's call him Israel, who has equity of 450,000 shekels and a mortgage repayment capacity of 5,500 shekels. Let's assume for example that today he lives with a roommate and pays 2500 shekels, meaning he can save 3000 shekels per month.If the same citizen knew with certainty that even if apartment prices rose, their purchasing power would remain the same, meaning they could buy the same apartment in five years as they can today. Our Israel would have no reason to worry and rush to purchase an apartment while taking such a great risk.The way to give him the confidence that he will be able to buy the same apartment in the future that he can buy today is simple. What if there were a security whose price is linked to the housing price index? That is, Israel’s 450,000 shekels + 3,000 shekels per month would allow him to buy, say, 10,000 units of this security, which, if apartment prices rise by 10%, the price of this security would also rise by 10%, and then that person would know that the apartment he can buy today, he will also be able to buy in two years, and there is no need to rush—if the price of the apartment rises, his capital will also rise by the same percentage.Actually, this idea is not new and is not my original one. As early as 1996, the Bank of Israel conducted Research On the possibility of the state issuing bonds indexed to the housing price index.This study likely stirred up quite a stir, and therefore, in a very short time, this idea reached a discussion in the Knesset's Economics Committee in 2011. This discussion in the Knesset's Economics Committee was an interesting one. To read the full protocol, click here.The committee chairman, Carmel Shama, presented the advantages of the move as detailed above.Finance Minister's advisor Dr. Avi Simhon holds prestigious titles: Head of the Agricultural Economics Department at the Hebrew University, an expert in macroeconomics and Israel's economy. In my opinion, he wonderfully demonstrated in this discussion the disconnect between academia with its theoretical models and the people who earn a salary and expect to live on it, and perhaps one day even buy an apartment.Schachmon made an interesting claim (Remember that this is about 2011):From the protocol:(The yellow highlighting is mine).Why did I write that Sheshon demonstrated the academy's disconnect from people? Not because of the prediction, which in hindsight is a comedic interlude about how 2011 prices are the peak? No one can predict the future. I think Sheshon is disconnected from the public when he refers to a security tied to apartment prices (and accordingly to the apartments themselves) as something that is only supposed to generate returns and not security in the ability to purchase an apartment. Suppose someone buys a bond tied to apartment prices for the amount corresponding to a four-room apartment – a million and a half shekels. If the apartment price falls and the price of his bond falls accordingly – he will still be able to purchase a four-room apartment – he's set.Of course, the opposite (that the apartment price will rise) is historically more common, and even then, the bondholder would indeed benefit from the return, but would remember that the largest family expense (buying an apartment) also became more expensive – their situation neither improved nor worsened. One can think about the same point from the opposite direction: the same family that did not buy the bond that would have protected them from the rise in apartment prices because the government feared the bond's price would fall, that same family eventually bought an apartment with a large mortgage, and if apartment prices had fallen, they would have been hurt much more.It can be noticed that Shimhon also states that "three years ago we didn't think about it" after the Bank of Israel had already "thought about it" and conducted research exactly four years earlier.Member of Knesset Yitzhak Vaknin He spoke after Mahon and did what, unfortunately, some members of Knesset specialize in, namely passing the buck: that"The state" Solve the problem. As if the Knesset members aren't the ones driving the "state": (The emphasis is not in the original).In my opinion, even Vaknin demonstrates a lack of understanding of the issue when he thinks construction will lower prices, at a time when there are an enormous number of buyers both from outside and inside the country who will continue to purchase even if supply increases, solely due to the belief that prices are rising. Evidence for this can be easily seen in entire neighborhoods in Rishon LeZion and Ashdod where no one lives in the apartments; they are owned by residents from abroad. When a resource is limited (land for construction) and the goods (homes) cannot be imported, any attempt to "flood" the market is doomed to fail as long as the public doesn't believe in the government's ability to truly "flood" it. Therefore, solutions must be sought in other areas. And the very Israeli summary(Duration of the meeting, assuming it started on time - 40 minutes).Actually, an apartment in Israel is a product for which I don't know an economic model that can predict its price behavior. On one hand, the product or a substitute product cannot be imported from abroad, and on the other hand, customers/consumers from abroad do purchase it. This trend will only strengthen with every terrorist attack or discovered antisemitism in Europe.So a solution was proposed years ago. The professionals in the Treasury thought it was good, and yet it didn't progress. What do you think, has "after the holidays" arrived yet?SummaryThe article reviewed the possibility of creating a financial product – bonds linked to apartment prices – which would serve as an alternative for the public who want to be sure they can purchase an apartment in the future. Holding this security will reduce demand for apartments as it will take two large audiences out of the game: Investors looking for capital appreciation (which they can receive from this security, without the hassle of actually owning an apartment).Families and individuals who, at this stage, do not feel an urgent need to purchase an apartment for residence, but fear they will not be able to do so later, and therefore purchase.Update 12/2/2015:From the office of Member of Knesset Yaakov Peri, we announce:The housing crisis and lowering the cost of living are important issues at the forefront of the Yesh Atid faction and MK Yaakov Perry's priorities, and we are working to bring about change on the matter.We thank you for the points you raised in your letter and take them into consideration.We will contact you further if necessary.Knesset Member Eitan Cabel stated:Thank you, and very interesting...Sent from my iPhone :-).Members of the Economy Committee who did not respond to my request:Nava Boker David Biton Yitzhak Vaknin Abd al-Hakim Haj Yahya Dov Khenin Yossi Yona Uri Maklev Ayelet Nachmias-Verbin Rooey Palkaman Issawi Frej Nurit Koren
I'm not far from the guy on the forum, and if there really was a real estate-linked bond, I would definitely prefer to go that route.Reply
Hello Pomegranate,As usual, you publish interesting and in-depth articles that I enjoy reading. Thinking outside the box and through efficient economic analyses. I think the bond peg solution is an excellent solution that can solve the problem from the demand side and moderate it. But in my opinion, this is just one of the tools. Several points to consider: 1. You did not address the main fuel for the rise in housing prices, which is cheap money. The restrictions that the Bank of Israel imposed on mortgages to reduce risk came too late (the first restriction came in 2011 to a third of prime, which you like less). Today, in every review of the Bank of Israel's monthly interest rate decision, you can read about the consideration of mortgage risks. Bank of Israel is careful to note that the risks are decreasing, but the question is what about mortgages taken before the restrictions? For example, the restriction that requires borrowers to take at least 1/3 of the mortgage in a fixed rate track. . The Bank of Israel and the government must assess changes in economic parameters and evaluate risks, just as we do for our clients when we build a mortgage mix for them. Bank stability is the primary goal, but if the crisis originates with borrowers—as happened with subprime loans in our economy—the consequences will be even more severe. Admittedly, in Israel you can "only" take out 75%, but between us, you’ll encounter at least 90% in cases where a family has additional loans. No matter the purpose—whether it’s to supplement equity (did someone say a 90% mortgage?) or any other reason—the risk increases significantly, so the family’s total debt should be taken into account. In my opinion, a mix composed of two-thirds variable rate pegged every 5 years and one-third prime is a very high-risk mortgage, and before the restrictions, it was very popular among borrowers because of the low "interest rates.". 2. Consumer Price Index and Housing Price Index - In my opinion, a separation must be made between the indices, as the inclusion of the Housing Price Index within the Consumer Price Index distorts the data. Therefore, there has been a dramatic rise in real estate prices alongside a minor rise, or even a decrease, in the Consumer Price Index over the past two years. This can somewhat explain the disconnect between wage growth and housing price increases. (For example, in the public sector, if I'm not mistaken, wages are usually indexed to the consumer price index). And as you mentioned, when there is an indexation to the housing price index, consumers' purchasing power will not be harmed. 3. An additional step concerning the housing price index should be an economic model that calculates expectations for the housing price index, similar to consumer price index expectations. With its help, it will be possible to curb the "market" if necessary through monetary and/or fiscal tools.Thanks again for the article HiReply
Shai, thank you very much for reading and for the detailed response. Obviously, each article touches on some things and not others., Otherwise, it will be a book, not an article. This article did not discuss risks at all; I did that previously. This article is a kind of call to action for decision-makers regarding a small, actionable item. In a profound way and with great impact.Two small notes regarding what you wrote: I completely agree that if they wanted to reduce the risk, they should have mandated fixed-rate mortgages. And not a fixed-rate mortgage.I disagree with you on the need to mandate a third of the mortgage in fixed installments. The percentage in fixed installments should In my opinion, it should be calculated based on the apartment price, not the mortgage amount. For example, two families took out a mortgage of 600,000. For one family, this amounts to 70% of the apartment, and for the other family, it amounts to 20% of the apartment. Are both families in the same Risk and should they be forced to take the same fixed mortgage percentage? In my opinion, no.Reply
Thank you Pomegranate, I wish there were more professionals like you who promote the industry. Of course, the article is being discussed, not the book, and perhaps that's something for you to consider. that it's time to write a sequel to the excellent guide you wrote. There is a great lack of professional literature in the field. Every so often, I go into bookstores and look for books with the keyword "mortgage," and every time I'm disappointed again. The most updated book is from 2009, "Mortgage at Eye Level.".Regarding your comments My comment was general, you are right and limits should be made according to financing percentages (risk percentages). Because if we take a regular loan of 100,000 from the bank, it will all be on the Prime track. However, even with the low financing rates, the mix consists of 100% variable-rate plans Can bring a family to a place where they cannot handle the monthly repayments.Thanks again. Looking forward to reading the next article.HiReply
The idea is good. Its disadvantage is that the apartment price includes leverage, while you can't take a similar mortgage to buy bonds.In other words, the hedge against rising apartment prices is at the level of the down payment, not the full price of the apartment.Reply
Hello Sasson and thank you for your response, No insurance is fully comprehensive. It's like saying the disadvantage of home insurance is that there's a deductible, and because of that, you're not insured at all. So, it's true for someone who intends to buy with a large mortgage percentage that it's not full insurance. On the other hand, removing those who buy without a mortgage or with a small mortgage (foreign investors, domestic investors, and others) from the market will reduce demand and cause a price drop that will benefit everyone.Reply
Hi Rimmon, As usual, an interesting article, written in simple and to-the-point language. As a couple after marriage, we started saving (we had savings of 14,000 per month), but then prices began to rise. In fact, no matter how much we saved, we couldn't keep up with the growing gaps – the rise in housing prices and the limitation on personal capital. Given that we also had children (which is not a burden), but the savings were small, as soon as we could, we purchased an apartment, meaning we advanced the purchase and bought at a price that we felt was unrealistic. Real estate bonds would have solved this problem for us – we would have "pegged" our savings to the offered index and thus at least be sure we were on the right track. Well done SpringReply
Thank you very much for reading and responding, Aviv. That's exactly who I was referring to :-).Reply
Hi Rimon An excellent suggestion to tie apartment prices to a new index, then fewer apartments will be bought as you explained. One problem I see: Why would the government pay me (a property investor) or a family that currently doesn't want to buy an apartment at today's prices, or a family that doesn't have enough equity, the return that will be tied to the new index? What profit would it get from this? Isn't this money that someone will have to pay to the public? Thank you BoazReply
Hello Boaz and thank you for your comment, The state constantly pays money for purposes it deems important. Even today, the government pays money, for example, to those who move to a national priority area (which changes from government to government according to its outlook). In the same way, a government pays child benefits without asking "what does it get out of it" because it has been decided that a certain standard of living is the right of every child. When the Industrial Development Bank or the Trade Bank collapsed, the government paid citizens for their deposits. In contrast, the state pays compensation to terror victims because their rehabilitation is a value the state champions. The government issues consumer price index-linked bonds on which it pays the index plus interest. What it gains from this is capital raising. Here, an option is proposed to raise capital with a component from the index separately, where the benefit will be the welfare of citizens and addressing a problem that, though late, was eventually recognized by the government as a social problem. If you wish, I have already heard someone define housing prices as a social terror attack.As for the sources of funding, a large portion of the price of an apartment consists of various taxes. Clearly, when prices rose by 100%, the government collected more taxes.Reply
Because with bonds, I only index the actual investment amount, whereas if I purchased an apartment under the 80/20 program, I indexed the value of the entire apartment—even though I only invested 20% of its value.What’s more, if I buy it in a presale (but a real one), where the price is usually about 10% cheaper, and I also get the 80/20 deal and other perks, I’ve already made a profit of 10% on the apartment’s total value, even though my total investment is only 20% of that value. And if the market has risen by only 15% overall in two years, the celebration is off the charts, and I know enough people who’ve done this.Usually, in cases like this, you end up making a 100% return on your investment within two years, so who would go and invest in index-linked bonds?Reply
I think your post beautifully illustrates the tulip parable I wrote about in the article. I suggest you remember and remind your clients that at the end of every rise, there is a fall. Even if people have made a nice profit on such speculation for ten years, There will be those who will be hurt by it in the end. So if the damage will be for a third / fifth apartment It's not terrible, but those who are tempted to do so with a first apartment could suffer greatly.Reply
It doesn't really matter what happens to bond prices; what matters is what happens to purchasing power. The family's decision to buy an apartment. And the answer is – it won't change in a downturn, or it might even be greater.On the other hand, your client who commits to a high price of 80/20 presale, etc., knowing that they don't actually have the money but will be able to sell at a profit, could find themselves in big trouble if the price drops.
Interesting and enlightening as always!!!I would be happy to hear if you could share why a real estate investor like you buys unusual apartments 'that sane people don't live in'. Aren't you afraid you won't be able to sell the apartment? And to which 'unsane' people will you be forced to rent it? B. And another question, if possible, regarding a mortgage for expansion and renovations, what percentage of the apartment's value can be mortgaged?Reply
Hello Abraham, Thanks for your question. Which business would you prefer to open, a business with a product that has high demand with many competitors Or a business with less demand but fewer competitors?There isn't an apartment that doesn't sell. It's all a matter of price. What I'll need to sell cheaply in the future, I buy cheaply in the present.The same applies to renting. Here, in my opinion, there is a significant advantage in working with apartments that have demand. Low. Tenants will always be found, at a slightly lower price (not terrible, the yield is still higher (Because I also bought cheaper). Additional advantages: I prefer to work with young people (students, young couples, divorced people) Confirming with families, when adding an elevator (TAMA 38), it's clear that the value of the higher apartment will increase more.Reply
Hello Abraham, I'm not worried that I won't be able to sell the apartment. At a suitable price, every apartment will be sold. I do not consider myself a magician who buys cheap and sells dear. But at a fair price, I would definitely market it.The "crazy" people who will rent the apartment are people who wake up in the morning and go to work and receive an average salary that allows for a low standard of living. In practice, I don't think there's a connection between income level and the risk of me stopping receiving rent, for example.B. 50%.Good luck., PomegranateReply
Hello Pomegranate. I read the article and the idea is definitely interesting. 2 points that came to mind:The bond should be linked to housing prices plus average rental yield. Otherwise, it will still be more attractive to buy a small apartment (for insurance purposes) and be tied to prices, in addition to receiving rent, and if that's what people do, then we haven't solved the original problem, which is reducing demand. Not that I think every young family will do this, but it's still something to keep in mind.2. REITs (Real Estate Investment Trusts). Apparently, there is already a mechanism in the capital market that allows you to be linked to housing prices, without the saga of buying an apartment. However, because it is ultimately a private company stock, and not a government bond, the stock's value suffers from the natural volatility of the capital market and cannot serve as a solution for people who want to buy an apartment in the short to medium term. Another disadvantage is that there is no government guarantee for this money.Reply
Hi Gal, Thank you for your comments. 1. No insurance policy fully covers the damage; rather, it is designed to be cost-effective to purchase. For instance, health, auto, or home insurance all have deductibles. The goal here is not to push all investors into the stock market, but to create a simple alternative that will prevent couples from going crazy out of desperation. Take, for example, the broker’s comments on this article. Investing 20% when you don’t have the money, based on the "knowledge" that prices will rise, is, in my opinion, crazy (and probably in his opinion too, since he’s talking about his clients who did this, not himself). Additionally, calculating rental yields is a complex and expensive process that would require a team of researchers. Average housing prices can be obtained at the click of a button, since every transaction is reported electronically to the tax authority. Note that, with the exception of a small number of people, most people do not want to be real estate investors but rather to buy an apartment at their own pace and live in it. Purchasing for the sake of "insurance" against price fluctuations is expensive—6% + VAT on the apartment’s value will be paid solely to the lawyer and real estate agent (half of that upon purchase and half upon sale).REITs operate in the commercial real estate sector, not residential. A specific fund does not guarantee the "average" but rather the return of the specific assets it has purchased. You could have good luck with a fund that acquired good assets and bad luck with a fund that is managed less well.Reply
Pomegranate hello, As a buyer of the second type (a family that assumed apartment prices would rise and that we wouldn't be able to buy an apartment at all in the future), I think your analysis is accurate and intelligent. I wish the Knesset members would also be convinced of the need to find a solution for families to buy apartments, and not listen to the wealthy who are making a profit off apartment prices. Keep writing, and hopefully your voice will be heard among the Knesset members as well. I would appreciate an update on the progress. AmirReply
Fascinating article, but many other effects need to be examined.You have a grenade, 2 questions.How does this work with bonds? Is the price of a bond affected by supply and demand, or is it a fixed, face value price? What happens if there is a rush to purchase bonds (from families + investors), will it affect their value? And how, and will it affect the real estate market itself?You're essentially suggesting 'reducing demand'. Meaning, if a certain family is not currently required to buy an apartment, let's postpone them and in the meantime they can preserve the value of their money through bonds. How long will you postpone them? Because you can't keep adding more and more immigrants non-stop, because eventually this 'hill' will force you to release land and build apartments for all those immigrants who are in "limbo" and waiting for their apartments. In that case, perhaps the whole bond issue is unnecessary, and we should focus on releasing land and accelerating construction. While it might sound like "increasing supply,' it's actually 'decreasing demand' because it will allow more families to find housing, and the market would theoretically calm down a bit...Baruch (blessed), RonReply
Hello Ron, The bond price, similar to the stock price, is determined daily on the stock exchange by Demand and supply. The bond's terms are specified on the bond itself, such as a payment of 3% of the bond's face value—for example, 100 shekels. Each day the investors will decide how much money they want to put in today to receive 103 shekels at the end of the year. If they are 100% sure that the bond issuer will meet its obligations (for example, if it's the government) and on the other hand The other two options will yield only 1%, so the price can be expected to range from 100 to 102 shekels.If there is a surge of investors into these bonds, their value will rise, but only if investors actually buy them instead of apartments. And their price will fall, so the yield on these bonds (tied, as mentioned, to apartment prices) will also fall, and then demand will decrease, and there will be equilibrium. A specific supply and demand.2. Like with anything in life, it's a matter of dosage. The issue is that the government has difficulty controlling the supply of apartments. With the supply of bonds, one can Control with the press of a button.Reply