To buy a house in Israel or not
Real money is made on long term options.
In places like Israel the currency has no value, some right now would say the same thing about America, but I am not so sure I agree. The issue is what do you buy if the money has no value. You have to store wealth somehow, and in Israel people do it in real estate. I must say in real dollar terms I can not think of a worse short or long term investment. The average wage in country is about $1500 per month, and a apartment costs at least $150k for something average. So if you look at the mix, it costs 8.3x the value of the the average salary to buy a decent apartment. In America they will not lend you money if you exceed 4x in a ratio. So to put it in real dollar terms it costs 2x in Israel what it costs in America, and these are pretax figures, when you take the taxes into account it gets even uglier.
When I was younger I could not image owning anything for more then 5 minutes, maybe 3 months, but as I am growing up I am learning how to bet, and the key thing that I think people forget is your time horizon. Every bet you make with money has three parts to it, reward, time to maturity, and risk. To take bond terms and use them here, it is very important to make sure that you lock your maturity in. You want to have the time for a deal to go upside down and back again without worrying, and that is what long term debt and other such stuff is for.
A great example of a deal that can not go sour if you can hold the duration is a 30 year mortgage in the US. Looking over the last 90 years the average rate of inflation was 3.49 percent. If you can lock a mortgage at 6% for 30 years you are effectivity paying assuming a 34% tax rate, less then 1% for your money. Pretax interest payments are worth roughly 2/3rs of their face value. The underlying asset in buying a home is normally sound, people need places to live and for the most part over the long term they at least go up with the value of money. If a period of high inflation hits and you have a fixed rate mortgage, the math can turn so the bank in paying you money effectively to borrow money from you in real dollar terms.
In Israel the best mortgages, are 60% LTV, US dollar priced variable rate mortgages. So if you want a $150k flat, you have to come up with $60,000 in cash, and take a mortgage for $90k. Now your earnings are not dollar based, but your mortgage payment and your loan are, so lets take the last 10 years for example. You started with an exchange rate of 2x, and now you have an exchange rate of 4.5x, so your payments went up in NIS terms significantly. If you had a $1000 per month mortgage you went from paying 2000 to 4500 NIS per month. The underlying value of the property probably did not go up much unless you bought in some pockets of the country like Bet Shemesh.
The issue is over the long term, what else can you buy in Israel that makes sense. There really is a dearth of quality assets to buy in the country so people still buy the overpriced real estate. This drives the rental yield to 2-2.5%. The fact is if you can hold the apartment or house for 30 years odds are you will make some money and you will probably do okay, if you could choose however to over the 30 years pay rent, and actually bank the difference in a savings account out side of Israel that was invested in the S&P500 you might do better.
The fact is people are still buying bricks and mortar even when it makes no financial sense like in Israel and that is probably because of social pressure and because it is a fairly safe investment for someone to make who has limited real options on what to do with their money. I think in the long term however if they can change the banking system or give a deduction for interest on home loans it will make more sense to buy, but for now I am going to not buy in Israel as it just does not make sense for me as I have other real options on what to do with money.
Benjamin
In places like Israel the currency has no value, some right now would say the same thing about America, but I am not so sure I agree. The issue is what do you buy if the money has no value. You have to store wealth somehow, and in Israel people do it in real estate. I must say in real dollar terms I can not think of a worse short or long term investment. The average wage in country is about $1500 per month, and a apartment costs at least $150k for something average. So if you look at the mix, it costs 8.3x the value of the the average salary to buy a decent apartment. In America they will not lend you money if you exceed 4x in a ratio. So to put it in real dollar terms it costs 2x in Israel what it costs in America, and these are pretax figures, when you take the taxes into account it gets even uglier.
When I was younger I could not image owning anything for more then 5 minutes, maybe 3 months, but as I am growing up I am learning how to bet, and the key thing that I think people forget is your time horizon. Every bet you make with money has three parts to it, reward, time to maturity, and risk. To take bond terms and use them here, it is very important to make sure that you lock your maturity in. You want to have the time for a deal to go upside down and back again without worrying, and that is what long term debt and other such stuff is for.
A great example of a deal that can not go sour if you can hold the duration is a 30 year mortgage in the US. Looking over the last 90 years the average rate of inflation was 3.49 percent. If you can lock a mortgage at 6% for 30 years you are effectivity paying assuming a 34% tax rate, less then 1% for your money. Pretax interest payments are worth roughly 2/3rs of their face value. The underlying asset in buying a home is normally sound, people need places to live and for the most part over the long term they at least go up with the value of money. If a period of high inflation hits and you have a fixed rate mortgage, the math can turn so the bank in paying you money effectively to borrow money from you in real dollar terms.
In Israel the best mortgages, are 60% LTV, US dollar priced variable rate mortgages. So if you want a $150k flat, you have to come up with $60,000 in cash, and take a mortgage for $90k. Now your earnings are not dollar based, but your mortgage payment and your loan are, so lets take the last 10 years for example. You started with an exchange rate of 2x, and now you have an exchange rate of 4.5x, so your payments went up in NIS terms significantly. If you had a $1000 per month mortgage you went from paying 2000 to 4500 NIS per month. The underlying value of the property probably did not go up much unless you bought in some pockets of the country like Bet Shemesh.
The issue is over the long term, what else can you buy in Israel that makes sense. There really is a dearth of quality assets to buy in the country so people still buy the overpriced real estate. This drives the rental yield to 2-2.5%. The fact is if you can hold the apartment or house for 30 years odds are you will make some money and you will probably do okay, if you could choose however to over the 30 years pay rent, and actually bank the difference in a savings account out side of Israel that was invested in the S&P500 you might do better.
The fact is people are still buying bricks and mortar even when it makes no financial sense like in Israel and that is probably because of social pressure and because it is a fairly safe investment for someone to make who has limited real options on what to do with their money. I think in the long term however if they can change the banking system or give a deduction for interest on home loans it will make more sense to buy, but for now I am going to not buy in Israel as it just does not make sense for me as I have other real options on what to do with money.
Benjamin
posted by Benjamin Cox at 5:07 PM
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