What a high shekel means for you

The Bank of Israel cut its interest rates by 0.5 per cent to 3.25 per cent this week — its lowest ever — in an attempt to curb the shekel’s appreciation against some of the world’s major currencies. But what does this mean for Israel’s economy — and for the many British businesses and tourists with links to Israel?

The shekel has been rising sharply against both the dollar and sterling in the past year. The dollar has slumped from 4.2 to the shekel to 3.5, while sterling has fallen from 8.3 to 6.9. Meanwhile, economic forecasters have warned that a slowdown could be on the way, as the effect of the sliding global markets start to take hold. All of this means mixed blessings for British people with connections to Israel.

So far, Israel’s economy has withstood any immediate affects of the credit crunch — growth for the second half of 2007 was 5.9 per cent. But this is expected to drop this year to its slowest since 2003, according to the Bank of Israel, with a growth rate of around 3.6 per cent, compared to 5.3 per cent overall in 2007.

Shmuel Ben-Tovim, economics minister at the Israeli embassy in London, says: “There is a general feeling that the situation is more stabilised now [following the rate cut]. But there is a still concern over the growth for this year, which will be slower than expected.”

Jonathan Katz, a macroeconomic consultant for HSBC, explains: “The economy has been purring along, and although we are not looking at a recession, the combination of the weaker global growth outlook, coupled with the very surprising appreciation of the shekel, and the very dramatic erosion of export profitability to the US, will mean a slower growth rate.”

If the economy slows and demand drops for Israeli real estate, property prices could decline too. So is Israeli property a good investment?

Mr Ben-Tovim insists that it is: for UK buyers, he argues, now is as good a time to buy as any. While acknowledging that the strong shekel has disadvantaged foreign investors seeking to buy in Israel, he says that the lower interest rates will make financing a purchase easier.

He says: “UK investors have a greater buying power than before. Israeli property prices are quoted in dollars, so the weakness of the dollar is an advantage. If you are quoted $100,000 for a property, for a UK buyer paying with UK currency, the price becomes cheaper as the dollar becomes weaker than the pound. Being quoted in shekels would be worse for the UK buyer.”

However, Hanan Schlesinger, the chief executive of Israel’s Anglo-Saxon Real Estate, says buyers need to be cautious. He says his company, and others, are now quoting in shekels. “Buyers should beware when prices are still quoted in dollars. Some agents keep in the small print, or don’t even mention, that they are still working from a much higher exchange rate than the banks are giving.” According to Mr Schlesinger, average house prices in Israel rose by 10 per cent in 2007 in real shekel terms, meaning that, in sterling terms, prices increased by more than double that percentage.

Prices of Israeli homes have risen by about 25 per cent in real terms over the past three years — in some prestigious areas by 50 per cent. But Mr Katz says prices in these regions will stabilise as a slowdown sets in. For those looking to buy, he advises waiting three to six months to see if prices fall.

But if you are hoping for a collapse, you may wait in vain. “Unlike the US and UK, the Israeli property market is not in a bubble. Israel’s market began to recover from the intifada in 2004, and it has been a very modest recovery. Therefore, prices are not exorbitantly high and destined to crash.”

What has the appreciating shekel meant for holidaymakers? Yonatan Harpaz, director of the Jerusalem Hotel Association, claims UK holidaymakers will not be paying much more for a stay in Israel until the end of 2008, as Israeli hotels are usually tied by contractual agreements with overseas companies. But he says that, for the end of 2008 and for 2009, hotels will have no choice but to increase their prices by at least 7 per cent in dollar and sterling terms.

He says: “I suspect tourists are cutting back on their spending when they leave the hotel. I’m sure that retailers of jewellery, fashion goods and other expensive items are feeling the pinch from the strong shekel.” A year ago, tourists were getting close to 9 shekels to the pound. They are now getting 7. The Bank of Israel has cut interest rates by a full 1 per cent in the past two months, but interest on the shekel remains firmly above the 2.25 per cent interest rate on the dollar.

    Last updated: 8:17am, August 19 2008