According to recent research by Swiss investment banking firm UBS, Tel Aviv, the hub of Israel’s economic growth and development, has earned the unpleasant reputation of being a possible real estate bubble.
According to the company, which publishes an annual Global Real Estate Bubble Index, recent significant shocks to the financial markets, rising interest rates, and global inflation will significantly impact home prices, either stagnating prices or declining valuations.
The cost of living in Tel Aviv, the most expensive city in the world, has increased by 18% just in the previous year, while the number of outstanding mortgages has risen by an unsettling 18%.
The affordability of apartments relative to local income, rental prices, changes in mortgage rates, and construction activity are some indicators used by the UBS research to assess risk in housing markets.
These factors determine the scores given to large cities, which range from below -1.5 (undervalued markets) to over 1.5. (a bubble risk).
Tel Aviv scored 1.59 in the most recent study, putting it in the risk category with other major cities like Tokyo, Zurich, Munich, and Toronto.
Since UBS defines a housing bubble as “a considerable and continuous mispricing of an asset, the presence of which cannot be demonstrated unless it bursts,” it is impossible to predict when prices will decline until homes start to lose value and draw in buyers.
The organization lists several signs of bubble conditions, such as a complete disconnect between real estate values and local earnings and rentals, as well as an abundance of lending and construction activity.
According to the most recent statistics from Israel’s Central Bureau of Statistics, average prices for apartments in Tel Aviv are a staggering 4 million NIS (1.25 million dollars), while the average wage is 11,753 NIS.
This means that an average citizen would need to earn approximately 340 monthly wages (or close to 30 years of income) to purchase an apartment in Tel Aviv.
In 2012, an average flat in Israel required 177 monthly earnings or almost 14 years of salary.
One of the least affordable towns for its residents is Tel Aviv, where high-tech workers make an average of 26,828 NIS per month and would still need to work 11 years to afford even an 80-meter (861 square-foot) apartment in the city center.
According to the survey, Tel Aviv’s property market has experienced another “explosive phase of price growth” since 2019, but unsettlingly, the number of outstanding debts also increased at the fastest rate in 25 years, indicating that the city’s residents are living above their means.
Interest rates have risen sharply in 2022, with the Bank of Israel boosting interest rates five times over the year to 2.75%, according to a warning from UBS that “the probability of a strong but short-lived correction is considerable if mortgage rates rise further.”