Photo Credit: Nati Shohat/Flash90

Israel’s consumer prices have fallen, but the solution to elevated housing prices still remains elusive. According to the Central Bureau of Statistics, the drop in consumer prices was a surprising 0.7% compared to the expected 0.2%. The inflation rate is negative, with the biggest drop in prices in fresh fruit, which fell 8.7% followed by clothing and footwear, which dropped 5.4%.

Although the latest data provided good news at the supermarket, Israeli housing prices are still high and rising. Prices were 0.1% higher for April-May 2017 compared to March-April, and in comparison with April-May 2016, home prices were 4.5% higher. These statistics are not yet final, since there are transactions that still have to be calculated.

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Housing prices have been a persistent issue in Israel in recent years, with a shortage of 150,000 to 200,000 housing units. Prices have doubled in 2007. However, certain measures have slowed down the acceleration of prices somewhat, including measures that regulate investment activity and an increase in mortgage interest rates. The solution to the housing crisis is likely to be gradual to remedy the years of slow construction. Areas in Herzliya and Rishon leTzion are being freed up for increased building as army camps are being moved to the south. However, there doesn’t seem to be an instant remedy for Israel’s housing prices.

The Bank of Israel announced that it would leave interest rates unchanged as the inflationary environment is low for the third consecutive year. It revised its growth forecast from 2.8% to 3.4% because of robust export and investment activity, two factors that have improved dramatically since the prior assessment. The economy continues to grow at a 4% pace.

The strength of exports is somewhat surprising, given the strength of the shekel. This may be an indication of the resilience of Israel’s exports, or the robust shekel could be a result of the vibrant trade. In addition, direct investment and an expansionary monetary policy in Europe and Japan are also worthy of  note.

The S&P rating for Israel is still at an A minus after it was upgraded in 2011. However, it may be surmised that Israel is due for a boost since a major criterion for the rating–debt to GDP–has improved. In 2011, debt to GDP was 69% and now it sits at 64%. That rise in Israel’s S&P rating may occur if it is determined that the decrease in debt was not due to the business cycle or governmental fiscal policy.

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