Last October's Consumer Price Index gave decision-makers in the economy a feeling that the threat of inflation has been, for the time being, postponed. The index rose by only 0.1%, and since the beginning of the year, the rate of inflation has been 2.6%.
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But if we remove time-related variables from the index, such as the steep drop in airfare and consumer products like apparel and footwear, the picture grows much darker – particularly if we consider the steep, 9.9% rise in housing prices.
It should be kept in mind that the Israeli economy in general, and the housing market in particular, cannot remain hermetically sealed from the rest of the world. Rising global inflation is indicated first and foremost by the world's leading economy, the United States. Last October, while we celebrated our supposed lack of inflation, data from the US Federal Reserve showed an inflationary trend unprecedented since the 1980s – 6.8% annually. This was not a one-time or temporary rise. I believe it is a new trend.
The reasons are many and diverse – among other things, the steep rise in oil prices and other commodities, the rising costs of transportation during the pandemic, and an increase in the purchase of consumer products, from cars and housing to apparel. The data shocked the heads of the Federal Reserve, including Chairman Jerome Powell and decision-makers in the US economy, who in 2020 forecast that inflation wouldn't be more than 2% to 2.5% in 2021.
Is what happened in the US a blinking red light warning of the danger of inflation in Israel as well? In my opinion, absolutely. First of all, it is impossible to separate local inflationary processes from global ones, particularly those in the US and Europe. Secondly, I expect that the continued rise in housing prices in the coming year will eventually fuel inflation here as well.
Clearly, what stemmed the rise here is the strengthening of the shekel against the dollar. It is also clear that rising inflation means that the interest rate will be raised, just as the American Federal Reserve has already announced it will do next year, and just like what occurred in Israel previous years, when governors of the Bank of Israel used the "interest rate weapon" in an attempt to stop inflation.
As every first-year economics student knows, rising interest rates mean a significant increase in the monthly mortgage return – in some cases amounting to many hundreds of shekels. Decision-makers in the economy, including the Governor of the Bank Israel, should begin to prepare for such a scenario.
It's no secret that over the past year, which saw an extremely rapid recovery from the effects of the pandemic, not only the number of apartment purchases grew dramatically, but also the number of mortgages taken. The mortgages also grew in size, averaging NIS 950,000 per household, compared to NIS 550,000 in 2015. The general scope of mortgages also increased and will probably total NIS 130 billion in 2021 – almost twice the total in previous years.
This is, without doubt, an extremely problematic scenario, resulting mostly from the actions of the Bank of Israel itself in December 2020, when it allowed lenders to take out two-thirds of the mortgage at the prime interest rate. It is also the result of a post-pandemic effect and the depleted supply of apartments, particularly in high-demand areas. I've been warning of this phenomenon for some two years now, with the inventory of unsold apartments in Israel today totaling only about 15,000 units. This fact in and of itself constitutes a warning sign regarding the situation in the housing market.
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Decision makers, led by the economic ministers – at the Finance, Interior, and Housing ministries – should attend to this dangerous trend. They should act to immediately expand the apartment supply through the automatic increase of building rights by 30% in every project (the Shabas-Kahlon law), 20% for reduced-price housing, and 10% for reduced-rent housing. At the same time, steps must be taken to protect mortgage takers. This integrated plan is vital and should be implemented immediately. Otherwise, when inflation arrives, we'll all be in dire straits.
Roni Mizrachi is president of the Chamber of Contractors and owner of Mizrachi & Sons Group.
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