Did the Israel Housing Market Collapse?
- J.P. Katz
- 3 minutes ago
- 4 min read
Podcast Summary
Israeli Real Estate Reporting Scandal
JP Katz, director at The TRIBE Group, and Haim Etkin, a real estate analyst and appraiser in Israel, discussed the new letter sent by the Israeli Security Authority to real estate companies regarding their reports to 2025. Etkin compared this to the Enron scandal, highlighting concerns about transparency and financial reporting. Katz focused on understanding the procedures behind land releases, builder-bank relationships, and the current state of the real estate market, emphasizing the need to explore these topics in a factual and less speculative manner. They agreed to start the discussion with the new letter as a case study to delve into the underlying processes and their implications for the market.
Warning Letters in Israeli Construction
Etkin discussed a warning letter sent to Israeli real estate and construction companies, highlighting critical mistakes in their financial reports, such as including sales deals which are structured around financing packages in property valuations (eg. pay 10% now and 90% after the property is built and buyer moved in, a total of four years from signing). He explained that these companies, facing a lack of bank funding due to numerous unfinished construction sites, resorted to selling shares and unsecured loans (debentures) worth 20 billion and 140 billion shekels to investors, including pension fund managers. Katz clarified the concept of debentures as unsecured loans and emphasized the risks involved, noting that these large corporations had sold shares and debt to the public market.
Israeli Real Estate Bubble Debate
Etkin explained that the Israeli real estate market has been experiencing a bubble since 2012, with prices being double their actual value due to a lack of yield on investments. He claimed that there has never been a housing shortage in Israel since 2012, contrary to popular belief, and that the market is currently in a surplus with 85,000 unsold apartments. Etkin compared Israeli real estate prices to those in Florida, highlighting the high costs in Israel and the better value for money in the U.S. Katz requested Etkin to slow down and clarify the distinction between sales price and value in the context of real estate investments.
Israeli Real Estate Market Bubble
Etkin explained how negative yields and high mortgage rates are creating a bubble, with prices being double the economic value. According to Etkin, the economic value is based on rental income as compared to cost of managing the property (e.g. mortgage payments, repairs, etc.). Thus, if the net income from the investment is grossly negative compared to other places one could invest the down payment required to aquire the property, then this difference between the sale price and the value is the definition of a "bubble." Etkin estimated that the current real estate sales prices are 50% of the economic value of the properties.
Israeli Real Estate Supply Bubble
This bubble is clarified further by measuring the excessive supply of unsold condos and the discrepancy between sales prices and rental values. Etkin explained that banks have stopped lending to builders due to unsold inventory and the need for guarantees, leading to builders seeking alternative funding through selling of equity and debt notes to investors which include those entrusted with Israeli labor force's pension funds managers. They also discussed the high number of available condos compared to the number of actual households, with Etkin clarifying that most of the unsold units are located in central Israel, contradicting the narrative of a regional shortage in central Israel and claims that all the "extra" housing are in the periphery where no one wants to live.
Warning Letters in Israeli Construction
Etkin discussed a warning letter sent to Israeli real estate and construction companies, highlighting critical mistakes in their financial reports. For example, if finance deals mentioned above cause buyers to sign for a higher price since it will only become due at least four years from signing, then those sales prices are overstated. He explained that these companies, facing a lack of bank funding due to numerous unfinished construction sites, resorted to selling shares and unsecured loans (debentures) worth 20 billion and 140 billion shekels to investors, including pension fund managers. Katz clarified the concept of debentures as unsecured loans and emphasized the risks involved, noting that these large corporations had sold shares and debt to the public market.
Israeli Real Estate Bubble Crisis
Etkin discussed the similarities between the current Israeli real estate market and historical financial crises, comparing it to Enron and the 1980s bank stock bubble in Israel. He predicted a 25-30% correction in property prices before government intervention, with banks likely to push for government bailouts to prevent a complete collapse. Katz inquired about the implications of rising unemployment due to AI displacement and potential government measures to support homeowners and renters. They agreed to continue the discussion in future meetings, focusing on these and other aspects of the current real estate bubble.
Etkin compared the current market to the Enron scandal and Madoff Ponzi Scheme, highlighting concerns about transparency and deliberately overstating asset value in financial reporting and false claims that the Israeli real estate market "always goes up." The bubble requires buyers and institutions to continue to feed money into it in order for the scheme to continue. However, when the money stops flowing, the bubble pops.