Tel Aviv Price Boom Tests Local Borrowers’ Limits: Mortgages

Ehud Barak, the former Israeli prime minister, doubled his money when he sold an apartment in north Tel Aviv’s Akirov Towers that he’d bought in 2003 for about 12 million shekels ($3.5 million).

Barak, 72, said in an interview that he used the profit to purchase a smaller home in the nearby Assuta luxury complex, and five apartments in the planned Icon TLV project close to city hall that he’ll rent out.

Israel’s surging home values, driven by record mortgage lending, are good for long-term owners like Barak. First-time buyers are stretching their finances to the point that the Bank of Israel warned against taking on too much risk. Rising prices and efforts by the government and central bank to cool the market failed to deter Israeli homebuyers taking advantage of the lowest borrowing rates since 2009.

“There is a mentality in Israel that everybody needs to buy their own home and people get a lot of help from their families,” said Tzvi Shapiro, general manager of First Israel Mortgage brokerage in Jerusalem.

About two-thirds of Israelis own their homes, according to the Central Bureau of Statistics. That’s about the same as the U.K. and is also the average for the countries that use the euro, Eurostat estimates.

The challenge for new buyers is particularly acute in Tel Aviv, where locals compete with cash-rich foreign investors, like they do in cities such as New York and London. As homebuyers pour in, a shortage of development land and a cumbersome planning process create a squeeze that is helping to stoke price increases in the city of 400,000 people.

Manhattan Logic

“It’s the same logic that drives prices up in Manhattan,” said Yigal Zemah, who manages billionaire Nicolas Berggruen’s real estate business in Israel. “There’s no more space to buy, everything has to be demolished and the only way to build is up.”

Low mortgage rates have fueled the surge in purchases. The average rate stood at 2.34 percent at the end of March compared with 2.91 percent two years ago, data from the central bank show. The Bank of Israel reduced its benchmark interest rate to 0.75 percent from 1 percent in February and maintained the level in March. That’s down from 2.5 percent two years earlier.

Growing unemployment “causes much greater harm than what is happening in the housing market,” Bank of Israel policy maker Rafi Melnick said in an interview with Army Radio, discussing the decision to cut the rate in February.

Efforts to cool the market have focused on tightening lending availability. The Bank of Israel capped home loans to first-time buyers at 75 percent including mortgage insurance in 2012, when it was headed by Federal Reserve vice chairman nominee Stanley Fischer. Prior to that, borrowers could get as much as 95 percent of the value by combining mortgages and insurance.

Borrower Beware

The change resulted in more homebuyers taking unsecured loans to cover their down payments, leading to the Bank of Israel’s warning this month about risky borrowing.

Buyers should think carefully about how they’re going to make payments for years to come and not be tempted to take mortgages they can’t afford, the bank said on April 8. A recession similar to the one experienced by Israel in 2002 would mean that 23,000 borrowers would have trouble repaying their mortgages, Bank of Israel commercial banking supervisor David Zaken said at a conference in Tel Aviv the same day.

Mizrahi Tefahot Bank Ltd. is Israel’s biggest mortgage lender, followed by Bank Leumi Le-Israel Ltd.

The average selling price for a Tel Aviv home rose to 1.75 million shekels last year from 1.63 million shekels in 2012, according to the Israel Tax Authority. In the city’s seven most desirable neighborhoods, the average was 2.7 million shekels, said Matthew Bortnick, a consultant at The Maki Group brokerage in Tel Aviv. Israeli housing prices overall jumped 80 percent between 2007 and 2013, according to the statistics bureau.

IMF Warning

The median price of Manhattan apartments climbed 19 percent in the first quarter from a year earlier to $972,428, according to an April 1 report from appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

The International Monetary Fund in February said that Israeli home prices were 25 percent above a sustainable level and that there was a 20 percent chance of a housing bust that could spark a recession. A committee including Prime Minister Benjamin Netanyahu in March approved proposals to exempt first-time buyers from value-added tax and cap new home prices, steps that could attract even more people to the market. The prime minister on March 8 said the government’s efforts to bring down prices have been insufficient.

Slow Moving

A slow moving planning process has prevented developers and authorities from cooling prices by increasing supply. In Israel, it takes an average of 13 years from the initial planning stages to delivering the keys of a finished apartment to the buyer, said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc, citing government statistics.

The supply of affordable housing has tightened because much of the development taking place in Tel Aviv is focused on luxury apartments. The Tel Aviv Estate Index of the 15 real estate stocks with the highest market value fell 0.2 percent today. It’s risen 3.7 percent this year.

Architect Richard Meier’s glass-fronted tower looms over the city’s skyline, trussed with construction cranes. At the top is a 15,000 square-foot (1,390 square-meter) duplex apartment above the fashionable Rothschild Boulevard that features sea views, seven bedrooms, a home theater, a private gym and a swimming pool, according to Zemah, who supervises the project as chief executive officer of Berggruen Residential in Israel. The asking price is $50 million, a record for the country. Two penthouse sales exceeded $40 million, according to the report by Miller Samuel and Douglas Elliman.

Emotional Link

“These penthouses are for people who don’t really need a place to live because they already have another residence, or several,” Zemah said, shuffling through construction debris in the tower 600 feet above the street. “For many Jews, Israel is an emotional thing, but it’s also proven to be an excellent investment.”

Investors from China, Russia and South America are driving up prices in cities where real estate is considered a safe investment, said Jeffrey E. Levine, chairman of New York-based Levine Builders and president of the Jewish National Fund. In Israel, the foreign buyers are mostly Jews from countries such as Russia, France and South Africa, attracted by their cultural ties to the country.

Value Increases

“With the rise of anti-semitism around the world, many Jews are expressing a desire to have a place in Israel in case things get worse at home,” said Levine, who is building The Edge and 1 North 4th Place developments in Brooklyn’s Williamsburg neighborhood.

Demand keeps building for Tel Aviv real estate in spite of Israel’s reputation as a powder keg at the center of Middle East conflicts and international efforts to boycott its exports because of its military occupation of the West Bank, where Palestinians hope to establish an independent state.

“Property values keep going up because Tel Aviv is a great city to live in,” former Prime Minister Barak said in the interview at the G-Tower, where he rents an apartment while awaiting Assuta’s completion in 2016.

Tel Aviv’s vibrant nightlife also attracts buyers and holidaymakers. Mayor Ron Huldai has cultivated a reputation for tolerance that led to the city being named the most gay-friendly travel destination of 2011 in a poll by

Open City

“It’s a 24-hour open city and people love it,” said Shira Dunsky, a broker at Sotheby’s International Realty in Tel Aviv. “They either want to move here or vacation here. Many come every three months or so to visit their apartment.”

Competing with the jet-setters is a local population facing economic headwinds. Israel’s $273 billion economy has been hurt by an appreciating shekel and diminished demand for its exports. Gross domestic product grew 3.3 percent in 2013, the least since 2009, and the Bank of Israel last month reduced its 2014 forecast to 3.1 percent. Exports, accounting for one-third of the economy, rose 0.7 percent in 2013, down from 0.9 percent.

Escalating housing costs led to a summer of protests in 2011 that drew as many as 400,000 people to the streets. Hundreds pitched tents on Rothschild Boulevard for months to demonstrate their inability to make ends meet. Israel has the highest poverty rate among the Organization for Economic Cooperation and Development’s 34 countries and has the fifth-widest gap between rich and poor.

Enthusiastic Buyers

So far, the hazards of property investing haven’t damped Israelis’ enthusiasm for taking out more and bigger home loans. Mortgage lending has more than doubled over the past 10 years as prices have risen and more properties change hands, Shapiro said. In March, home loans climbed to a record 4.5 billion shekels, Bank of Israel’s Zaken said.

“We have all these first-time homebuyers who are tying their money up for 20 to 30 years in mortgages they can barely afford,” said Alex Zabezhinsky, chief economist at Tel Aviv-based Meitav DS Investment House Ltd. “That cuts significantly into their spending power and it’s a big weight on economic growth.”

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