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2/16/14

Middle East - Israel: More worries for the boycott-hit economy? IMF criticizes the Bank of Israel, warns of massive real estate bubble

The IMF implies in its annual report on Israel, published yesterday, that there is a real estate bubble in the country. It says that home prices are now 25% above their equilibrium value, after rising 80% in the past six years since 2007.

 Home prices relative to income and home prices relative to rents are 26% and 22% above the long-term level.
The IMF attributes half of the rise in home prices to the housing shortage, and half to the jump in mortgages, which is mainly due to the Bank of Israel's low interest rate policy in recent years.

The IMF says that home prices in Israel, both compared with other countries and compared with historic levels in Israel, are very high compared with their "fundamental" value; i.e. the value that can be explained by economic factors (supply and demand, economic growth, the interest rate, etc.). A bubble is defined as a severing of the actual value from the fundamental value; in effect, the IMF is warning that there is a real estate bubble.

Furthermore, the IMF made a comparative study with other developed countries, and found that the chances of a crash in Israel's home prices is over 20%, and therefore, "cannot be ignored."

Read more: More worries for the boycott-hit economy? IMF criticizes the Bank of Israel, warns of massive real estate bubble | Al Bawaba

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