News Column

"Home price rise damaging growth"

July 1, 2014

By Kobi Yeshayahou, Globes, Tel Aviv, Israel



July 01--In his weekly macro survey, Excellence Investments Ltd. (TASE: EXCE) chief economist Yaniv Hevron comments today on the slowdown in private consumption in Israel, and argues that it stems from the rise in home prices and the influence of social networks.

"The great question is, what happened to the local consumer to make him or her consume less? What happened to make us forego some of life's pleasures and tighten our belts a little? The answer, I believe, is twofold, with the main cause lying in the Israeli real estate market. After rises of 70% in home prices and 60% in rents in seven years, the disposable income of the Israeli public, after deducting the housing item (and on the assumption that demand for housing is inelastic), is simply falling. Since average income has risen by only 22% in these years, there is a clear hit to the free resources of the domestic consumer, hence the damage to the economy's growth potential.

"Further interest rate cuts in Israel will not solve this problem," Hevron insists. "The housing market needs to be cooled down, construction needs to be accelerated, and the public's disposable income after housing expenses needs to grow again."

Hevron mentions a further reason for the decline in consumption. "The second reason for the weakness is consumer resistance, which has changed thanks to the communications media and the Internet age, which makes price comparison easy. Price comparison has become something of a national sport, as we insist on getting the best return on our money, and not necessarily the product we desire. This too is something that an interest rate reduction will not change, but only the general mood, renewed income growth, and time, which is always the best healer for everything."

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(c)2014 the Globes (Tel Aviv, Israel)

Visit the Globes (Tel Aviv, Israel) at www.globes.co.il/serveen/globes/nodeview.asp?fid=942

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Source: Globes (Tel Aviv)


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