What Is The Relationship Between Commodities Prices and Tel Aviv Real Estate Prices?

We would like to expand the notion that the Tel Aviv Real Estate Market is behaving more and more like the Commodities Market.

Backwardation takes place when the current price of an underlying asset is higher than the price trading in the Futures Market. Sometimes, the concept of backwardation is misinterpreted with an inverted futures curve. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the future through the futures market. The primary cause of backwardation in the commodities’ futures market is a shortage of the commodity in the spot market.

If you think of real estate as a commodity, I know it’s a bit of stretch, but let’s assume this is the case for a moment. Backwardation is the normal state. Intuitively, if you were considering two identical apartments, the only difference being that one is ready now and the second is ready in 3 years, you’d pay more for the former. There are many practical reasons for the premium that you’d pay. But beyond that fact, there is the concept borrowed from the options theory, of the time value of money. This is a core principle of Finance. A sum of money in the hand has greater value than the same sum to be paid in the future. This is one of the factors that explain why apartments for delivery in 3 years should be cheaper than an apartment ready immediately.

To finish our analysis, read the rest on our new Tel Aviv real estate blog here.