Moody’s Israel’s Credit Rating Downgrade: Potential Impacts on the Real Estate Market

February 17, 2024 / 108 views
Alin Goldshtein
February 17, 2024 / 108 views

The recent downgrade of Israel’s credit rating by Moody’s from A1 to A2 has raised concerns about its impact on the real estate market. How is the downgrade expected to affect the real estate market?

Potential Damages of credit rating downgrade on Israeli real estate sector

The real estate sector, which is also the largest consumer of credit in the economy (480 billion shekels), is expected to be the first to be affected by a move that is expected to raise the interest rate on loans. While the effects may not be immediately apparent, economists agree that an increase in risk premium leads to higher financing costs. This cost will be borne by all market players: developers, investors, and homebuyers. We will see an increase in the cost of capital on both the supply and demand sides of the market, and I do not doubt that this will exacerbate the slowdown in the real estate market.

Downgrades Potential Damages:

  • Increased borrowing costs: The higher interest rates will make it more expensive for developers and contractors to borrow money, which could lead to a slowdown in construction activity.
  • Reduced demand: The higher mortgage rates will make it more difficult for homebuyers to purchase properties, which could lead to a decrease in demand.
  • Impact on prices: The combination of reduced supply and lower demand could lead to a decrease in property prices.
  • Mitigating factors: However, other factors, such as the continued growth of the Israeli economy (especially, post-war) could mitigate the negative effects.

Overall, it is difficult to predict the exact impact of the credit rating downgrade on the real estate market. It is important to monitor market developments and consider the potential implications before making any investment or home purchase decisions.

Should you buy a property in Israel now?

As mentioned, one of the effects of Moody’s downgrade is that the combination of reduced supply and lower demand could lead to decreased property prices. The decision of whether to buy an apartment now or wait depends on various factors, including individual financial circumstances, risk tolerance, and expectations for the future of the market.

  • For those with stable finances and a long-term perspective, buying during a period of the downturn can potentially lead to future gains.
  • For those with limited financial flexibility or a shorter-term horizon, it may be prudent to wait until the market stabilizes and interest rates settle.
  • We would not advise individuals who need to take more than a 30% mortgage to buy a home at this time when mortgage interest rates can reach higher than 7% even with the possibility of property price reduction.

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