If housing prices fall too quickly, it could trigger a recession in Israel, the International Monetary Fund wrote in its annual consultation, released Wednesday.
Home prices are about 25% higher than their long-term fundamental value, the report said, noting that levels of income and rent do not justify the prices. That level is in and of itself worrisome, but its effects the real economy will depend on how quickly the prices come down.
“A slow correction would allow the economy to escape a recessionary episode, but economic prospects would be weak for a prolonged period of time. By contrast, a rapid adjustment would lead the economy into recession, with consumption and output recovering two years after the shock,” the report said. A third scenario, in which prices slowly adjust to their equilibrium value, would leave the economy relatively unscathed.
According to the report, there is a 20% probability of a housing “bust,” in which real estate loses over a tenth of its value, happening in the next five years. If prices were to fall 6.5% in one year, consumption growth would fall 3% in the long run.
That may come as a surprise to both Finance Minister Yair Lapid and Housing Minister Uri Ariel. When The Jerusalem Post asked Lapid about the danger of a rapid drop in house prices in September, he responded, “When somebody lives within his house and the price is lower, it doesn’t affect his life in any way. I’m more concerned about not succeeding to lower the price.”