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The Housing Market in Israel 2008-2010: Are House Prices A "Bubble"?

Author

Listed:
  • Polina Dovman

    (Bank of Israel)

  • Sigal Ribon

    (Bank of Israel)

  • Yossi Yakhin

    (Bank of Israel)

Abstract

Over the past three years house prices have risen rapidly. Between December 2007 and August 2010 prices rose by 35 percent in real terms – an average annual rise of 12 percent, much faster than their long term rate of increase. Against this background, concerns have been raised that prices have become disconnected from market fundamentals and that the recent rise has been driven by expectations of capital gains, which suggests the development of a bubble in house prices in this period. The objective of this paper is to evaluate whether a bubble has developed in house prices. To that end, we first review the course of prices over the last few decades and their development relative to rents and income; we then use standard asset-pricing methodology for estimating the "fundamental price" through three different approaches. Our analysis suggests that while prices are somewhat high relative to market fundamentals, from a long-term perspective their level is not exceptional relative to past episodes of rising house prices. According to our estimates, current prices (as of August 2010) are between 3 percent below and 10 percent above the fundamental price. That is, we do not find evidence supporting the existence of a bubble in house prices. If a bubble exists, it is in its early phases and it is still hard to detect from the data.

Suggested Citation

  • Polina Dovman & Sigal Ribon & Yossi Yakhin, 2011. "The Housing Market in Israel 2008-2010: Are House Prices A "Bubble"?," Bank of Israel Working Papers 2011.06, Bank of Israel.
  • Handle: RePEc:boi:wpaper:2011.06
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    Cited by:

    1. Adrienne Mack & Enrique Martínez García, 2011. "A cross-country quarterly database of real house prices: a methodological note," Globalization Institute Working Papers 99, Federal Reserve Bank of Dallas.
    2. Yossi Yakhin & Inon Gamrasni, 2021. "The Housing Market in Israel: Long-Run Equilibrium and Short-Run Dynamics," Bank of Israel Working Papers 2021.08, Bank of Israel.
    3. Nitzan Tzur-Ilan, 2018. "LTV Limits and Borrower Risk," Bank of Israel Working Papers 2018.12, Bank of Israel.
    4. International Monetary Fund, 2015. "Israel: Selected Issues," IMF Staff Country Reports 2015/262, International Monetary Fund.
    5. Itamar Caspi, 2015. "Testing for a Housing Bubble at the National and Regional Level: The Case of Israel," Bank of Israel Working Papers 2015.05, Bank of Israel.
    6. Dana Orfaig, 2017. "A Structural VAR Model for Estimating the Link between Monetary Policy and Home Prices in Israel," Bank of Israel Working Papers 2017.09, Bank of Israel.
    7. Tanya Suhoy & Yotam Sofer, 2019. "Getting to Work in Israel: Locality and Individual Effects," Bank of Israel Working Papers 2019.02, Bank of Israel.

    More about this item

    Keywords

    House Prices;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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