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Israel is very attentive to the health of its citizens, and about the coronavirus pandemic, this has resulted in two trends. Firstly, the state has been one of the world leaders in vaccination rates for a long time. Secondly, the restrictions were harsh with repeated lockdowns, and it was difficult for foreigners to get into the country. Of course, there were remote sales, but the opportunity to see the object and see with your own eyes the infrastructure surrounding it is still important for most buyers.
During the first knockdown, the deals stood up. And when they resumed, the market felt the same problems that affected the real estate sector everywhere else. First of all, this is a rise in the price of building materials and the cost of work. And since housing prices in Israel have been rising for many years, additional factors have only spurred their growth.
According to estimates made at the end of 2021, the annual price growth in the country was about 11%. Is it a lot or a little? In Australia, apartment prices increased by almost 20% over the year, in the USA – by 19%, in Germany - by 12%, in Sweden and Canada - by 11%. At the same time, in many European countries, the pace was much lower. In Finland, Norway, France, Belgium, and other countries, they were in the range of 5-7%. That is, Israel was about in the middle of the list.
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However, if we look at the data for the country over the past years, it turns out that 2021 was one of the record years. Annual price growth has already exceeded 10% according to the data for the third quarter, which was the largest indicator since 2010. The growth leader as of November was Jerusalem - prices there increased by 11.5%. In Haifa and the south of the country, there was an increase of 9.9%, in Tel Aviv - by 9%, and in the north – by 8.6%.
A four-bedroom apartment in Tel Aviv in the third quarter cost about 4 million shekels (approximately $ 1.3 million). In Ramat Gan, the price of a similar apartment was approximately 2.6 million shekels ($815,000), and in Jerusalem – 2.4 million shekels ($750,000).
In general, prices have increased by about one and a half times in ten years, and by June 2021 the average cost of a four-room apartment in Israel was about 2.2 million shekels ($682,608).
At the same time, from the point of view of the "bubble index", housing in Israel's main metropolis, Tel Aviv, although overrated, is not too significant.
Among the reasons for the constant increase in prices are the shortage of housing, low construction rates, blunders in tax policy, and increased investor activity, which leads to an increase in the number of empty housing. The problem is urgent for the country. Thus, in 2008, only 2% of households owned two or more apartments; in 2021, this figure was 10.5%.
In the coming year, another factor may affect demand. It is assumed that foreigners who plan to repatriate to Israel can massively buy up real estate even before moving to catch up to the next jump in prices.
The beginning of the pandemic froze construction, although there was no formal ban on construction. Then the process was slowed down by a shortage of building materials and components. As a result, from the beginning of 2020 to the beginning of 2021, the total number of new apartments for sale decreased by about 15%.
In 2021, the builders managed to win back. Sales statistics in new buildings were just fantastic. For example, in Bat Yam, a large suburb of Tel Aviv, 427.4% more new housing was sold in 2021 than in the previous year. In Tel Aviv, sales of new apartments increased by 35.8%. In Ashkelon, the growth was 51.1%, and in Jerusalem, 114.8% more apartments were sold than in the previous year. Nationwide, new home sales jumped by almost 40%. Large-scale construction continues in Modi'in, Ashkelon, and Gush Dan.
The Government considers housing construction a priority to slow down price growth and increase housing affordability. Therefore, in October 2021, a large-scale housing construction plan for 2022-2025 was adopted, aimed at rapidly increasing supply.
Experts also suggest that due to the lack of new land, many developers will turn to the renovation of existing housing.
In recent years, Israeli ministers have tried to influence the housing market by using a tax on the purchase of second homes, which directly affects investors. Back in 2015, Finance Minister Moshe Kahlon raised the tax from 5-8% to 8-10% (the rate depends on the price of the object). This was done specifically so that the main buyers of housing were those who plan to live in it. However, this caused a stir in the market and a sharp rise in prices.
The next finance minister, Israel Katz, canceled the tax increase in 2020 to attract investors to the country during the pandemic. As a result, prices shot up again, and housing became even less affordable for new buyers. Therefore, the current Finance Minister Avigdor Lieberman again raised the tax to 8%. The result is that obstacles are being put up for investors, but prices are still rising, that is, it does not become easier for new buyers.
Experts note that by pursuing a single tax policy for the whole country, the government does not take into account significant differences between the markets of different cities. So, Tel Aviv is called a "separate planet": the market of the Israeli metropolis has its unique trends for the country.
For example, although housing prices in the country's main metropolis are twice the average, rental rates in Tel Aviv are lower than in many other cities. Nevertheless, investors are looking at this location. The rental yield of apartments in the third quarter in Tel Aviv was only 2%. For comparison, in Beersheba, it is 3.1%, and in Haifa, it is 2.9%, but investors do not seek to go there at all.
On the contrary, in the first nine months of 2021, the Haifa district became the leader in the growth of sales made by investors: their number increased by 42%.
As a result, two parallel housing markets are being formed in the country. In the expensive cities in the center of the country, primarily in Tel Aviv, Ramat Hasharon, and Ra'anan, there were more investors at the viewing sites in September than young couples buying their first apartment. On the contrary, in Haifa and Beersheba, there were two young couples among those who bought an apartment for each investor.
In this regard, experts advise paying attention to Hadera – a city located approximately in the middle between Tel Aviv and Haifa. Those who cannot afford housing in the metropolis have already rushed there. Over the past year, the average cost of a four-room apartment has increased therefrom 1.35 million to 1.5 million shekels (from $418,000 to $464,000).
What to Expect from the Market in the Near Future
Israelis are still suffering because of the high cost of square meters, but the state efforts can still weaken the housing problem in the foreseeable future. In addition to raising the tax rate on second homes, the authorities have adopted a "Target Price" plan in recent years, which should make it easier for first-time buyers to buy a home.
According to this plan, 60% of all apartments built on state land are distributed at reduced prices among first-home buyers, but the most expensive cities, such as Tel Aviv and Herzliya, do not participate in the program. Although this measure is aimed at domestic buyers, it will lower overall demand, which may slow down prices in case of success. And this is already important for foreign investors.
According to Israeli Finance Minister Avigdor Lieberman, the gap between supply and demand will narrow by the end of 2022, which will slow down the growth of housing prices. And in 2023, prices may even decrease.
Sources: Hold Real Estate, Globes.co.il, The Times of Israel, The Times of Israel, Buy it in Israel, Buy it in Israel
