The Unassuming Economist

From the IMF’s latest report on Israel:

• On house price developments: “Housing price increases have slowed significantly but supply may also be weakening. After more than doubling since 2008, house price rises slowed to under two percent y/y in 2017, below household income growth. Transactions also declined, with investor activity likely affected by the proposed tax on owners of more than two apartments, and first-time buyers waiting to see the “Buyer’s Price” program impact.5 But residential investment began to decline in mid-2017, and a 16 percent y/y fall in starts in H2’2017 suggests further falls to come.”
• On financial sector and housing policies:
  • “Israel’s banking system is healthy. Capitalization, loan quality, and profitability continued to improve in 2017. The leverage ratio rose to 7.5 percent, exceeding that in most advanced economies. All five of the largest banks met the capital requirement, enabling them to resume or raise dividend payouts in 2017.”
  • “Household debt remains relatively low, with well-contained risks, and business debt has stabilized after declining significantly. The household debt ratio has been rising for a decade, but remains low at just over 40 percent of GDP. The BoI has maintained strong macroprudential measures in the housing area (…). As a result, new mortgages with LTVs over 75 percent have been almost eliminated, and the share of lower LTV loans has risen. However, consumer credit, which usually has a variable interest rate, is almost two-fifths of total household debt, calling for close monitoring. Business sector debt has declined to below 70 percent of GDP, with the stock of corporate bonds falling to 19 percent of GDP by 2017, 9 percent of GDP less than their former ratio. Limited supply and the global search for yield may be contributing to low spreads on these bonds.”
  • “Slowing housing construction despite still high housing prices calls for reforms to make supply more responsive to needs and to improve housing affordability. The authorities estimate that 45–50 thousand new housing units are needed annually during 2015–2020, rising to 60 thousand annually by 2026–35. Completions appear sufficient in 2016–2017, but shortfalls could return given recent falls in housing starts. Hence, continued reform efforts are needed:
    • “Land supply, competition, and regulation. Increased land auctions are needed to avoid supply constraints and to help make construction more responsive to variations in demand. Construction costs and time to build should be reduced by streamlining building regulations and expanding foreign construction company access.”
    • “Municipal incentives. To encourage timely municipal approval of residential development, residential property taxes should be raised—while avoiding work disincentives—coupled with predictable central government support to municipalities for the up-front costs of additional infrastructure and public services.”
    • “Expand commutable areas and increase urban density. Well-developed public transportation can expand commutable areas and relieve demand in major centers, hence plans to establish metropolitan authorities are welcome. Urban renewal should be increased as density in Tel Aviv is relatively low, including through the proposed fast-track approvals of mixed use development.”