Israel Unlikely Champ in Global Real Estate

Construction workers work at the construction site of a luxury apartment building in Tel Aviv,...

Construction workers work at the construction site of a luxury apartment building in Tel Aviv, Israel, in this file photo. Israel, despite perennial fears of war, has emerged as one of the hottest, and unlikliest, property markets in the world: Since real estate collapsed around the world in 2008, few if any countries have seen house prices rise faster.

(Ariel Schalit/AP Photo)

Amid that downturn, Israel stood firm, shielded in part by the fact that its property price gains were late in coming. While many countries were on a property high during the middle part of the decade, its market was largely stagnant.

Its banks offered nothing close to the U.S.-style subprime mortgages, and Israel's financial market is not intertwined with the mortgage market — the main reason for the U.S. housing meltdown. Down payment requirements remained high, often equal to more than 40 percent of a house's value.

Adding to the mix was a conservative local banking sector whose broader dislocation from the global market helped to shield Israel from the worst of the global meltdown.

What fueled the boom, however, were rock bottom interest rates and a relatively low supply of housing. The result was a nearly 30 percent jump in property prices since September 2008.

For Israelis, those gains are hard to swallow.

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After extensive house hunting, Ami Kaufman and his wife stopped looking at the "good" neighborhoods of Tel Aviv: At $600,000 for an unrenovated, three-bedroom measuring about 1,000 square feet (100 meters), it's simply out of reach.

Instead, the couple are looking at a working-class area in the hope it will gentrify like other down-and-out Tel Aviv neighborhoods did. They're hoping to find something within the year, before they're pummeled by rising mortgage prices on top of rising housing prices.

"The problem ... is demand versus supply," Kaufman said. "Too many people want apartments. Nothing is going to stop these rises."

Housing supply, says Vered Dar, chief economist at the Psagot-Ofek investment house in Tel Aviv, was "thrown out of whack" by the mass immigration of some one million immigrants from the Soviet Union 20 years ago. Housing starts surged excessively in the ensuing years, leaving contractors and the government struggling to find a balance.

Over the past five to six years, "they didn't build enough," she said, adding that housing was not something that could be imported to balance supply and demand.