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                          Will 2006 see a revival in real estate?

                           Bank Hapoalim Housing Purchasers' Index
                                              (January 1996=100)


   145



   135



   125



   115



   105
         2003                               2004                   2005           Dec.

Source: Bank Hapoalim

The real estate market in Israel has been in recession for a decade, in stark contrast
to real estate markets in the US and the UK, which have been booming in recent
years. Even the economic recovery in Israel that began in mid-2003 has not (yet)
succeeded in pulling the real estate market here out of the doldrums.

Given the extreme length of the real estate recession (with the accumulation of
significant pent up demand for housing) and the fact that the rest of the economy is
growing, the question as to why there are still no signs of real estate revival is
particularly interesting. Most commentators put it down to continuing uncertainty
among potential purchasers, uncertainty that may in itself be a result of the very long
recession and of the fact that the economic recovery is still in its early stages,
causing potential purchasers of housing to be still wary about taking upon
themselves the financial burden of buying a home, or a larger home.

What makes the question regarding real estate revival even more interesting is that
incentives to purchase homes have been improving steadily since the beginning of
2003. The major incentives are housing prices, which have been falling steadily,
mortgage interest rates which have also been on the decline, and incomes, which
have been rising gradually with the economic recovery. These incentives are
reflected in the Housing Purchasers' Index, published monthly by Bank Hapoalim
(see graph). The graph shows how the index has been rising throughout most of the
past three years: during most of 2005, the index increased at a much slower rate, but
it did continue increasing.

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However, incentives generally do not continue improving for ever. What has
happened most recently is that housing prices in Israel have begun to show some
selective increases. Mortgage rates have also begun to increase, in line with the
monetary policy change introduced by the Bank of Israel (and indeed by many
central banks around the world, including the Federal Reserve), which calls for
increasing rates of interest. These developments are reflected in the drop in the
Housing Purchasers' Index, shown in the graph, at the end of 2005.

If incentives have begun worsening, have potential home buyers missed the boat?
The chances are that the recent worsening of incentives will in itself act as an
incentive to persuade housing purchasers to enter the real estate market, before
incentives worsen even more.

Since the economy began recovering, commentators have asked at the beginning of
each year: will this year see a revival in real estate? At the beginning of 2006, the
possibility of a revival seems more likely than ever.

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                           (972) 03-6848444              (972) 03-6848803
        KPMG Millenium Tower, Suite 802,                  802     ,KPMG
   17 Ha'arba'a St., Tel Aviv 64739, ISRAEL              64739,          17
                                info@ibiz.co.il          www.i-biz.co.il