eal estate saw continued apartment price rises in 2010, while the government took steps to increase supply and restrain demand. The Central Bureau of Statistics housing price index rose by 15.2% in 2010 and since 2008 has risen by 29% in real terms. Despite the sharp rise in apartment prices in the past three years, rental prices have only risen 12%, and in 2010, there was a significant slowdown in the pace of rises. The Bank of Israel said in its annual report that the relationship between home prices and salaries equals on average 11 years work. This is higher than the long-term average which is 9.3 years.
The low interest environment in the economy since the global crisis reached a nadir of 0.5% and is considered one of the causes of the home price rises. Low interest creates surplus demand for apartments from investors buying a home for investment and this is the investment option in which most was being put. In the past two years, the Bank of Israel has changed its monetary policy and raised interest from the historic low to more than 3%, and the expectation is that interest will reach 4% by the end of 2011. This measure has succeeded in reducing the number of new investment apartments purchased from 30% at the end of 2010 to 25% in early 2011.
Due to the sharp rise in home prices, voices are being raised claiming that that a real estate bubble is developing. In the past year the Bank of Israel and government have stepped into the fray in an attempt to slow the price rises. These steps were designed to increase the supply of apartments and reduce demand for investment homes. The measures included restricting buyers groups, making mortgages more expensive, with their weight in an apartment's price higher, as well as restrictions on importing capital and tax instruments designed to restrain demand. On the supply side, the amount of land marketed was enlarged, betterment tax was reduced to those selling land, and steps were taken to accelerate construction.
In 2010, building output grew 7.1%, higher than the growth in business output. This growth was reflected in the rise in building starts and marketing of state land for apartments. Growth in the real estate sector was expressed in a 7.8% rise in the number of employees in the sector – mainly Israelis. The Bank of Israel warned in its annual report that despite positive developments, the low level of salaries will make it difficult to continue hiring Israeli workers – both for increasing activities and for changing over to non-Israeli workers.
Israel's real estate market is one of the world's most active markets providing investors with opportunities and risks. The wide scale of market activities and the high level of prices offer the investor high returns, while government support for lowering prices endangers investments. Other risks to be coped with are macro risks such as a rise in inflation and erosion of profits overseas following depreciation of the shekel. In these stormy surroundings following the rise in interest and the expected continue rise, there is a risk of a worsening economic situation for renters.
Another risk is contained in the fall of an assets value – income producing property companies may be confronted by a situation in which the value of the income producing assets that they own falls, among other things due to the financial strength of Israel in the world. In such an instance, the real estate company is highly leveraged – just a small fall in the value of the asset is enough to fully wipe out the equity invested - and thus hit the financial dependency of the company on the banks.
From the regulatory point of view, the residential real estate sector is closely supervised by the Bank of Israel and government, which is taking many steps to cool home prices. While Israel's home prices were rising, real estate developers successfully increased profits. If prices change direction, developers may find the value of land that was bought when prices were booming, falling due to low demand. In this instance, developers will be forced to lower prices to match demand and supply and profits will be eroded.
In the global income producing property market, there was a moderate improvement in 2010. According to global real estate consultants Cushman & Wakefield real estate investments rose 42% in 2010 to $565 billion. This is still half the level of real estate investments recorded in 2007. The forecast for 2011 is continued 5-10% growth to $606 billion. The largest market share in global real estate investment is in emerging Asian markets with $207 billion real estate investment followed by Western Europe and North America. Divided by income producing real estate sectors new investments last year were similar to 2009 with a rise in demand for investments in commerce and industry, mainly in developed markets alongside moderate demand in stable European markets. The country with most demand for investments is China, substantially ahead of the US, UK, and Germany respectively.
Total assets held by Israel's 20 leading real estate companies, which invest in incoming producing properties, amounted to about NIS 201 billion in 2010.