Israel's GDP growth has averaged 4% over the past 5 years compared with 0.7% on average for other industrialized nations, the IMF noted in its annual report on Israel.
The IMF cautioned that "house prices in Israel are about 25% above their long-term fundamental value." "The low interest rate environment and a search for yield have boosted the demand for housing, even as chronic shortages of planned land and delays in the process of obtaining building permits have constrained supply. As a result, house prices have skyrocketed (an increase of 80% in nominal terms since 2007)," the report says.
The fund noted that the situation is further exacerbated by red tape and the relatively high population growth.
The IMF also urged the Bank of Israel take more measures to prepare for a sudden drop in housing prices, which could create "macro-fiscal shocks, but stressed that Israel's economic indicators are praiseworthy.
"Israel's economic fundamentals remain strong. GDP growth is solid, unemployment is low, and inflation remains firmly anchored within the 1-3% target range. The financial sector is in good health and the external position is strong," it said. According to the IMF, the likelihood of a housing bust over the next five years is 20%.