Bethel Finance: OECD: Housing market at risk of hard landing

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Bethel Finance news:
The OECD believes that the Israeli housing market is at risk of a hard landing, despite measures that have been taken by the government and the Bank of Israel recently. "Efforts have been made to subdue demand, and the market has cooled off somewhat, but there remains a risk of a hard landing with a sharp downward price correction and a contraction in construction activity," the OECD says in a chapter entitled "How to improve the economic policy framework for the housing market" in its 2011 Economic Survey of Israel.

"Israeli house prices have risen by over 50% over the past three years. In part this reflects the fact that for several years housing construction had not kept pace with increases in the number of households. In response to these developments, hitherto sluggish planning-approval processes are being speeded up. However, in addition low interest rates have been boosting demand, and there are concerns that prices have already been driven to bubble levels," the OECD document.

OECD economists also offer a comprehensive policy package: cut tax exemptions for homeowners and real estate investors; focus on aiding the home rental market; focus on low-income families; legislating minimum rights and responsibilities of landlords and tenants in an effort to encourage the development of the rental market.

The bursting of the real estate bubble is not the only danger that OECD economists see. They believe that the previous crisis revealed weaknesses in the corporate bond market, a phenomenon that has remained a main source for concern, and recommend tightening regulation.

Although the organization welcomes the extensive compulsory retirement provisions, which are defined as adequate, and the programs to encourage the creating of investment portfolios in the lifecycle method is welcome, there is a need to simplify pension options. With regard to financial supervision, the OECD sees a need to improve coordination between various regulators, as well as increased monitoring of the large business groups in Israel.

In this context, the OECD suggests removing the Capital market, Insurance and Savings department from the Ministry of Finance in order to ensure its independence in practice.

On a macro level, the report praises the Israeli economy, including its financial sector, that came through the 2008-09 global downturn in relatively good shape.

The 'tent protest' added a new dimension to the socio-economic agenda, the report notes. However, although the OECD was the first body to announce that the Israeli economy would grow less than 3% in 2012, with an increase in the unemployment rate, and a deviation from the target deficit, it is optimistic about 2013, for which it forecasts growth of 4%