The Sub Prime Crisis– Its Effect on Israeli Real Estate

Two years ago, when news of the Sub Prime crisis in the United States first reached our ears, no one believed that it would have an effect on the Israeli real estate market. However, like many things in life this crisis set up a domino effect and became the precursor to the current global economic crisis.

In the past few years, financing for real estate projects was easily obtainable worldwide. Many Israeli companies embarked on real estate ventures outside of Israel, in a variety of far flung locations, such as Eastern Europe, Eastern Asia and North Africa. Indeed, many Israeli companies neglected the Israeli market in favor of foreign ones.

At the same time, the Israeli Real Estate market had its ups and downs. In the past few years the Israeli market had been on an upswing. There had been a rise in investments by foreign purchasers and prices had been rising. Then suddenly in 2007, Heftziba, a large construction company, failed under circumstances that dealt a blow to Israeli purchasers’ confidence in the local construction market. Fortunately, the crisis was handled well by the Bank of Israel in the form of decisions and legislation that provided added protection for a purchaser’s investment in a construction project. Confidence was restored and by the end of 2007 the Israeli real estate market was again on the upswing with equally good predictions for 2008. Investment in Israeli real estate was attractive to both Israeli and foreign investors. Life was good.

Then, as we all are aware, a crack in the armor of the Israeli real estate market began to appear during this past year and the crisis came to head during the second half of 2008 with the fall of markets and banks worldwide.

The banks requirements from construction companies concerning financial backing for real estate projects became far stricter. This resulted in fewer construction projects being initiated despite the fact that Israelis still needed places to live in. In the past, banks had demanded that companies invest 30% of its own money while they provided the other 70%. Today banks are demanding an extra 10% from companies. In addition, the highly unstable job market and a general feeling of uncertainty as to what the future holds for them has caused many potential purchasers to abandon their plans to purchase apartments. Also, despite the fact that the Governor of the Bank of Israel has lowered the Prime Interest Rate, the mortgage banks have raised their interest rates for mortgages. It is not surprising that all these factors have had an adverse affect on the real estate market, both for new apartments still under construction and second hand properties. Sales of second hand apartments had almost ground to a halt during the last few months of 2008. Many potential buyers, anticipating a drop in prices, were sitting on the fence waiting for the right price to the obvious dismay of sellers. This has been the situation for the past few months and we were all waiting to see who will blink first.

In addition, many of the mortgage banks are tightening their belts with regards to the mortgages they are giving to individual purchasers. In the past a purchaser could get financing of between 70% and 75% of the price of the property they were buying and if needed, they could apply for the additional assistance from EMI. However, EMI is owned by AIG which has been nationalized in the States causing many banks to stop working with EMI. Also many banks are now refusing to give more than 60% or 70% financing leaving the purchaser to find the rest of the money on their own.

So what do people do if they really need to purchase an apartment now? They purchase a smaller or cheaper apartment. In the past, a young couple would initially purchase a one or two bedroom apartment, with the knowledge that they would have to relocate as their family grew. In recent years many people felt that it was important to start with a larger apartment in order to avoid having to move home in the future. Now, due to the above circumstances, many young couples are again looking for smaller apartments, with future building rights allowing them to expand the apartment in the future.

It goes without saying that this has had an adverse affect on the prices of expensive luxury apartments. The newspapers are full of stories of prices being slashed in the luxury home market. This presents a great opportunity for those who have the capital and are looking for an investment other than the stock market. They can purchase now at an extremely reduced price, hold on long enough to weather the storm and then see a significant return on their investment.

It is also important to remember that Israel is a small country with limited land reserves. The percentage of land that can be used for residential purposes is low. It is predicted that by 2040 there will be about 13 million people living in Israel. This will require widespread construction projects with an emphasis on high rise buildings. Future plans for real estate development will have to include use of underground space, renovation or reconstruction of older buildings, expansion by adding floors to existing buildings, a higher standard of industrialized construction and more environmentally friendly buildings. The preservation of historical building has becoming more widespread as can be seen in places such as southern Tel Aviv, Jaffa, Jerusalem, Haifa and Zichron Yaakov.

The beginning of 2009 has seen a return to the market of sales in small and mid sized apartments.

The present may not look so good, but the future looks promising.