Global Investment Company Warns: Tel Aviv Real Estate Market Is A ‘Bubble Risk’

JERUSALEM (VINnews) — Tel Aviv, the nerve center of Israel’s economic growth and development, has gained the unenviable reputation of being a potential real estate bubble, according to a recent report by Swiss investment banking firm UBS. The firm publishes an annual Global Real Estate Bubble Index and says that recent dramatic shocks to financial markets, rising interest rates and inflation worldwide will hit housing prices hard, leading either to stagnation in prices or falling valuations.

Tel Aviv, the most expensive city in the world, has seen an 18% hike in prices over the last year alone, coupled with a worrying 18% rise in unpaid mortgages. The UBS report uses a number of factors to evaluate risk in housing markets including affordability which is a ratio of the price of apartments to local income, rental prices, mortgage rate changes and construction activity. Based on these parameters, major cities are given scores between below -1.5 (undervalued markets) and above 1.5 (a bubble risk).

In the latest report Tel Aviv scored 1.59, placing it in the risk zone together with other major cities including Tokyo, Zurich, Munich and Toronto.

UBS defines a housing bubble as “a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” This means that it is impossible to know whether price drops are around the corner until properties begin declining in value to attract buyers.

The company gives some indicators for bubble conditions including a total detachment between real estate prices and local incomes and rents, as well as excessive construction activity and lending.

According to latest figures from Israel’s Central Bureau of statistics, average prices for Tel Aviv apartments are a whopping 4 million NIS (1.25 million dollars) while average wages are 11,753 NIS, meaning that about 340 monthly wages (or close to 30 years of income) would be required for the average citizen to buy a Tel Aviv apartment. In 2012 the requirement for an average apartment in all of Israel was 177 monthly wages or about 14 years of income. High-tech workers make an average 26,828 NIS per month, meaning that they would still need to work 11 years to afford even an 80 meter (861 square feet) apartment in the center of Tel Aviv, making the city one of the least affordable cities for its own population.

Since 2019, Tel Aviv’s housing market saw another “explosive phase of price growth,” accordinf to the report,  but ominously outstanding loans also grew at the fastest pace in 25 years, meaning that the city’s population are living beyond their financial limits.

UBS warned that “the probability of a sharp but short-lived correction is high if mortgage rates rise further.” Interest rates have risen sharply in 2022, with the Bank of Israel raising interest five times already over the year to 2.75%.