Israel, the best-performing residential property market this year, may lose its standing after becoming one of the first countries to raise interest rates since the global recession began.

'A bubble began to emerge this year, fueled by the Bank of Israel,' said Shlomo Maoz, chief economist at Excellence Investments Ltd. in Tel Aviv. 'The bank is now beginning to raise rates again to fight inflation.'

The higher borrowing costs will dampen demand for mortgages, leading to a drop in property prices by the middle of next year, Maoz said