News Column

IMF warns on Israeli real estate bubble

June 12, 2014

By Adrian Filut, Globes, Tel Aviv, Israel

June 12--The international Monetary Fund has warned about a sharp rise in home prices in Israel and other countries around real estate markets around the world including those that collapsed in the global crisis in 2008. A special report compiled by IMF Secretary-General Min Zhu says that it is no longer possible to neglect the subject of home prices because of concern that it will create a real estate bubble. The report states that two thirds of the past 50 financial-banking crises around the world have been caused by "bursting bubbles" in the housing market.

The report states, "While a recovery in the housing market is surely a welcome development, we need to guard against another unsustainable boom. Housing is an essential sector of every country's economy and has systemic implications, which is why we at the IMF are focusing on it not only in individual countries but on a cross-country basis. But the task is difficult for a couple of reasons. First, assessing when house prices are out of line with economic fundamentals is as much art as science. Second, the policy toolkit to manage housing cycles is still under construction."

The IMF figures show that home prices in Israel rose 7.5% in the last quarter of 2012 and the first quarter of 2013. Of the 51 countries included in the report (including 13 OECD members), Israel was in eighth positions in terms of the rise.

The report adds, "The evidence on house price-to-rent and house price-to-income ratios, however, provides only a broad indication of housing market valuations. Judgments about housing valuation also require supplementary information, such as credit growth, household indebtedness, lender characteristics, and the method of financing."

The IMF found that rent prices are 10% above their historical average placing Israel 13th out of the 27 OECD countries studied in this category.

Senior IMF executives stress a dilemma over monetary policy including interest rate policy, which is being faced by Bank of Israel Governor Dr. Karnit Flug and her predecessor Prof. Stanley Fischer. Low rates encourage investment activities and lower unemployment but support a rise in home prices.

The report recommends that central banks must give more weight in their considerations over interest rate policy.


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Source: Globes (Tel Aviv)

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