Israel Unlikely Champ in Global Real Estate

"It takes time," she said.

But it's time that Israelis, increasingly, can't afford.

In this photo taken on Sunday, Feb. 14, 2010, a plane flies over the construction site of a luxury...

In this photo taken on Sunday, Feb. 14, 2010, a plane flies over the construction site of a luxury apartment building in Tel Aviv, Israel. 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. (AP Photo/Ariel Schalit)

(AP)

Today, a three-bedroom apartment in Tel Aviv, with its beaches, balmy weather and freewheeling spirit, fetched an average 2.15 million shekels, or $560,000, in June, compared with 1.73 million shekels a year earlier, according to government statistics.

The price of an average apartment in Jerusalem, with its holy sites and mixture of ancient and new, rose 19 percent to 1.55 million shekels, or $403,000, at the end of June from 1.31 million shekels a year earlier.

The prices seem out of sync with the average income in a country where the per capita GDP of some $30,000 is around the OECD average, but taxes are very high.

Parents, once able to buy their children apartments outright or give big chunks of down payments, are no longer able to do so. Even professionals are struggling to come up with the cash for housing. As a result, many find themselves simply unable to buy or are compromising on their dream houses.

The central bank's efforts to rein in prices with interest rate hikes have provoked government resistance, with the Finance Ministry worried that Fischer's rate hikes could hurt the economy by strengthening the shekel against world currencies and battering the vital export-oriented high-tech industry.

But officials have also not sat idle. The country's skyline is dotted with apartment towers and cranes, and a recent reform in the government-run Israel Lands Administration is designed to free up more land for construction.

Even before that reform was enacted, housing starts were up more than 20 percent in the second quarter of 2010 from the first three months of the year. Finance Minister Yuval Steinitz, however, told a business conference on Tuesday that it would take up to two years to solve the supply-side problem.

Dar, the economist, has long disputed assessments that Israel was experiencing a housing bubble. She describes it as "more babble than bubble" because the recent boom follows roughly a decade of stagnant prices in inflation-adjusted terms.