Fears of a bubble in Tel Aviv house market deflate, but prices still overvalued: UBS

Tel Aviv’s housing market is overvalued but less so than previously, as high interest rates and a surge in inflation and financing costs hit property prices, according to international investment banking and wealth management firm UBS.

After two decades of ballooning property prices, Tel Aviv slid from the risk for a housing market bubble to being an overvalued market where buyers are paying more than the homes are actually worth, according to the Swiss firm’s annual Global Real Estate Bubble Index for 2023.

The report analyzed the housing markets of 25 cities between mid-2022 and mid-2023 and found just two at risk of a housing bubble: Zurich and Tokyo, down from nine a year ago, which also included Tel Aviv.

UBS defines a housing bubble as a “substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts” and which can trigger a “large price correction.”

Since mid-2022, nominal housing price growth in the 25 major cities analyzed came to a standstill after a 10% rise a year ago, as rising interest rates fueled financing costs and as average mortgage rates almost tripled since 2021 in most markets.

“In inflation-adjusted terms, prices are actually 5% lower now than in mid-2022,” said Claudio Saputelli, head of Real Estate at UBS Global Wealth Management’s Chief Investment Office. “On average the cities lost most of the real price gains made during the pandemic and are now close to mid-2020 levels again.”

Construction on Gindi project apartment and office buildings in Tel Aviv, 2016. Photo by Nati Shohat/Flash90

UBS’s report evaluates cities’ housing markets based on sub-indices such as affordability (price-to-income), rental prices, mortgage rate changes and construction activity, dividing them into groups: those that the Swiss bank’s research assesses as having fair property valuations, those that appear overpriced, and those that, it believes, are so overvalued that there is a risk of a market correction.

Each city is given a score: above 1.5 (a bubble risk), 0.5 to 1.5 (an overvalued market), or –0.5 to 0.5 (fair-valued market)

Tel Aviv came in at 0.93, meaning overvalued, along with Toronto, Frankfurt, Munich, Hong Kong, Vancouver, and Amsterdam.

Property prices in Tel Aviv tripled between 2002 and 2022, showing the highest growth rate among the cities surveyed in the report, as interest rates plunged to a record low of 0.1% in April last year, which was accompanied by a housing shortage, UBS said. Furthermore, household incomes have not kept up with price growth, leading to stretched affordability.

Tel Aviv was also ranked as the most expensive city in Europe to buy a square meter of apartment in 2022, replacing Paris, according to a recent housing report by financial advisory company Deloitte.

Over the past year, the Bank of Israel has steadily hiked the benchmark interest rate to 4.75% in May 2022 in a bid to rein in inflation, while raising mortgage costs for homebuyers. As a result, home prices, which jumped by a record of about 20% in 2022 year-on-year, have started to cool down in recent months.

“It is no surprise that rising mortgage rates during 2022 ended the party [and] put an abrupt end to this boom,” according to the UBS report. “Mortgage volume growth has more than halved since last year and real price growth was negative in the first half of 2023.”

A construction site in southern Israel, May 2022. (Roman Mykhalchuk via iStock by Gety Images)

“This moderate easing of prices will likely continue as there are no signs of a demand rebound and past efforts by the government to increase housing supply may backfire now, because unsold inventories have been piling up amid a full construction pipeline,” it was added in the report.

During the month of July, the number of apartment purchases dropped by a sharp 27% year-over-year, according to the latest figures released by the Finance Ministry. Transactions fell 3% from June to July, according to the report, which showed Israel’s once red-hot housing market nearly grinding to a halt.

At the same time, the amount of income required to purchase a home is still relatively high, and with it, the affordability gap is continuing to widen. Property price corrections have not been enough to meaningfully improve affordability of a home in Tel Aviv, according to the UBS report.

That being the case, house prices remain decoupled from local incomes. In Tel Aviv a skilled worker now needs to work at least 12 years on average to be able to buy a 60 square meter (650 square feet) apartment near the city center. This puts Tel Aviv in the top five least affordable cities for its population together with Hong Kong, Tokyo, Paris, and London, where more than 10 times the annual income is required to purchase a home.

Additionally, Tel Aviv ranked in the top spot together with Hong Kong in terms of the number of years homeowners need to rent out their property in order to pay for it, followed by Munich, Zurich, Geneva, and Frankfurt. It would take 42 years on average for rental payments to cover the price of a property in Tel Aviv, according to UBS’s price-to-rent ratio.

“Such high multiples come from an excessive appreciation of housing prices in the wake of previously low interest rates,” it was noted in the report. “House prices in all these cities remain vulnerable to corrections should interest rates remain elevated for longer or continue to rise further.”

The price-to-rent ratio signals how expensive owner-occupied homes are relative to rental apartments. The higher the ratios, the more expensive buying becomes, according to UBS.

“Elevated price-to-rent multiples may also show expectations of rising prices, as is the case in Tel Aviv, Zurich, or Munich,” UBS. “Investors expect to be compensated for very low rental yields with capital gains.”

“If these hopes do not materialize and expectations deteriorate, homeowners in markets with high price-to-rent multiples are likely to suffer significant capital losses,” it was assessed in the report.

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