Israel’s out of control housing bubble

There are bubbles and there are mega bubbles. Is Israel’s housing bubble becoming a mega bubble?

According to Israel’s Ministry of Construction and Housing, the average cost of a 3 bedroom (4 rooms in Israel-speak) apartment in the 3rd quarter of 2013 was 1,200,000 shekels, or $347,000!!

Let’s compare this to Orlando, Florida. With real estate, we’re always mixing apples and oranges, but when you compare enough different fruits, you can eventually recognize a bubble. According to Trulia, the average price of a 3 bedroom home in Orlando is $208,000 — a difference of 40%. Things are good these days in Israel, but the Middle East is no Disney World.

In Houston, a 3 bedroom home costs $294,000; in Denver it is $267,000. You get the point.

When The Bubble Bursts

All bubbles eventually burst. All it takes is a .5% rise in interest rates mixed with high unemployment and many Israeli homeowners will be in deep water. When this happens, I can see the headlines — “they can’t kick us out of our home, we’ll be homeless.” The Hebrew media excels at the whining headlines. Those of us who didn’t buy a home during the bubble have the right to say, “You took a risk, we didn’t. We don’t want to pay for your excesses.” I don’t want to see tens of thousands of people go homeless, but there have to be limits as to how we help people who can’t afford to pay their mortgage. No one will ever help us pay our rent.

The Double Edged Sword of Low Interest Rates

The low interest rates were necessary to get us past the rough patch of 2008-2012. And today? It sure doesn’t encourage a culture of savings. Israeli banks offer near 0% incentive for saving money. All this, in a country where “the minus” is a way of life. I wish the bank would offer me a decent interest rate. Either way, it is important to save cash. My S&P 500 ETF is going to give me a much higher return 20-25 years down the line.

What Can They Do About It?

I understand the dilemma faced by the “powers that be.” Who wants to be the one to pop the real estate bubble? It’s like the hot potato game we played as kids — every politician hopes the real estate bubble bursts in someone else’s lap. And then there is the rule of unintended consequences.

Rising Prices Are a Narcotic

I’m not a real estate expert, I’m a bubble expert. I saw the 2000 internet bubble coming way ahead of time. When friends in Jerusalem were taking loans from the bank in order to buy internet stock, I knew the bursting was months away. In 2005, I saw the US housing bubble up close on a visit to Florida. I’ll never forget the gloom I saw by December 2008; they still haven’t fully recovered.

I know the arguments against a real estate bubble. There aren’t enough housing starts, the center of the country doesn’t have enough space as it is, etc.

Even legendary investor Warren Buffett didn’t see the US housing bubble. “Rising prices are a narcotic,” he famously said in 2010. “Bubbles become delusional. I didn’t think home prices would pop like they did,” 

Do you think Israel is experiencing a massive housing bubble? How do you think it will pop?

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