Israel’s Housing Market Amid Domestic Conflict And Economic Challenges

As the country approached nearly eight consecutive months of domestic conflict, the ongoing challenges are now beginning to shape the current and future trajectory of Israel’s housing market as real estate prices continue to climb despite lower interest rates and slower-than-normal demand.

June 2024 marked the fifth consecutive time that house prices have risen, according to data published by the Central Bureau of Statistics. Across the country, home prices have risen by 0.9%, and have already increased by 2.1% compared to the same period last year.

Israeli renters are seeing similar increases, as the average recorded rental prices for apartments have risen 3.7 percent compared to June last year, and have risen by 0.5% between April and May.

Renters have seen prices skyrocket in recent months, with some tenants having their rents increased by 2.5 percent after renewing their leases. Elsewhere, new tenants that have recently signed lease agreements have noticed a similar increase, with prices now up 3.7 percent compared to where they were standing last year.

Real estate experts, along with economists have called upon the government to intervene as prices continue to climb and residents are feeling the financial pressure.

Yet, would-be buyers and potential renters are puzzled over the ongoing increase in prices, even as interest rates have come down from their peak and real estate experts claim that the property market now has more than 20 months’ worth of available housing stock on the shelves.

While many are pointing fingers at the ongoing conflict in the North and the South of the country, the explanation of Israel’s current housing crunch is more complicated than many would initially think.

Stronger demand fueling price increase

Though conditions across the country have been anything but normal in recent months, Israeli residents aren’t shying away from buying up new developments or relocating from rural areas to more developed cities.

Earlier market analysis has shown that despite higher prices and uncertainty, there’s been strong demand for new apartments and homes sold by contractors and developers. In January 2024 over 3,716 apartments, including government-subsidized apartments exchanged hands compared to January 2023.

In fact, government-subsidized housing demand rose by 43 percent during the same period, while demand for new apartments has declined from its earlier peak of May 2022.

Most housing markets across the country have seen demand rise since the turn of the year. The Central Region clocked a 62 percent rise in the number of homes sold in January 2024 compared to the same period last year.

Similarly, Rishon Lezion, Ashdod, Modi’in, Rehovot, and Ness Ziona have seen strong demand since the beginning of the year, with the Ashdod region witnessing an increase of 33 percent in sales.

Though demand has been strong, prices are still moving in an upward direction. For instance, according to data compiled by 29 observations, the average monthly rental price for an apartment in Ashdod has increased by roughly NS 190 since July 2023, with the average price for an apartment being NS 4,116.20, as of March 2024.

Over in Rishon Lezion tenants are now paying as high as NS 4,786.000 per month, as the average price of an apartment in the region has increased sharply from NS 4,185.000 in March 2017 and have risen from NS 4,738.000 in December 2023.

Across the country, contractors and developers have seen demand outpace supply, prompting many to either increase the average asking price for tenants renewing their leases or keep prices elevated for new would-be renters entering the market.

Higher labor and materials costs

Though monthly wages for construction workers have remained somewhat stable in recent months following several quarters of strong improvements, contractors and developers are left having to face off with higher-than-expected materials costs and a shortage of skilled workers.

By February last year, the average monthly wage for construction workers was sitting around NS11,963 or $3,200 US dollars per month. Though there have been improvements, this remains below the former peak witnessed in December 2022, when the sector average was nearing NS 12,364 per month.

More than this, contractors have been forced to offer workers more competitive hourly wages as the availability of skilled construction workers has dramatically decreased since the attack of the Hamas terrorist group on October 7.

As many as 350,000 Israelis have been called up for reserve duty since the deadly attack occurred in October last year. Though many construction companies and developers have historically relied on Palestinian workers, border closures have meant that many have been barred from entering the country and have disappeared overnight, leaving construction sites dormant and seemingly silent.

As an immediate ban on any Palestinian workers took force, the construction industry turned to foreign workers from China, Thailand, India, and the Philippines. Between April and May, the industry had expected to welcome more than 6,000 Indian workers to help meet labor shortages, although as of mid-April just over 900 foreign workers have been recorded to arrive.

The Prime Minister’s Office (PMO) has said in the past that the government will assist the construction industry in the coming months by subsidizing charter flights for foreign workers who have signed up to work in Israel.

Labor shortages haven’t been the only headwind contractors and developers had to face off with in recent months. Material costs have risen sharply since the turn of the year as primary exporting countries, such as Turkey, have to restrict exports of 54 products, including construction materials to Israel.

Turkey was Israel’s sixth largest trading partner in 2023, with more than $5 billion of goods imported, representing nearly 5% of total imports and roughly 1 percent of Israel’s Gross Domestic Product (GDP).

Materials that have been restricted include raw iron bars, aluminum, copper products, concrete, steel, and cement. Over one-quarter of imports from Turkey were iron and steel-related products, while plastic, rubber, cement, and other ceramic products made up 10 to 15 percent of imports.

Other materials such as fiber optic cables, granite, and marble have all been barred from being exported to Israel. Experts claim that over 50 percent of materials used in the construction industry are imported from Turkey.

The severed trade relations had meant that many builders had to quickly find new suppliers or make alternative arrangements. The change in planning meant that both real estate and construction experts claim that new apartment listings are expected to become more expensive in the coming months as the sector tries to navigate the tumultuous political landscape shaped by the war.

Higher than usual mortgage rates

Aside from seeing real estate prices reaching new highs over recent months, the majority of would-be home buyers have been priced out of the market as interest rates remain historically high.

Back in January, the Bank of Israel, the country’s central bank lowered its key lending rate by 25 basis points. This marked the first decrease in nearly four years, as the central bank decided to lower rates in support of businesses and Israeli households that have felt the financial implications of the ongoing war.

However, since the beginning of the year, rates have remained high, with the bank deciding to leave the rate unchanged at 4.5 percent during its February meeting. Policymakers have said that they continue to gauge the situation with the Hamas terrorist group and Hezbollah forces in the North before deciding to initiate a further rate cut.

High interest rates have been a bitter pill to swallow for both home buyers and the broader construction industry. Similar to would-be homeowners taking out loans to finance their new home, contractors, and developers tend to take out hefty loans from banks to help finance the development of new construction projects.

However, the high interest rate environment, against the backdrop of rising costs and labor shortages has meant that many developers had to extend their loan agreements or further push up prices to make up for lost costs.

Though property ownership remains an important aspect of Israeli society, with residents having at least 70 percent homeownership, among the highest in the region, economic and political developments are now causing emerging headwinds for would-be owners and tenants who are having to deal with eye-watering costs.

Wartime inflation starting to heat up

Concerns over inflationary conditions have started sending warning signals across the economy, as the central bank continues to hold rates higher for longer in an attempt to put a lid on inflationary pressure.

Between April and May, inflation remained steady at 2.8%, although this marked an increase from 2.7% in March, and February’s 2.5%. Though some economists expected inflation to rise to 3.1% in May, the lower-than-expected levels were somewhat a sign of relief for the country’s economy.

Prices for everyday basics have continued to accelerate, with food, fruits and vegetables, and healthcare seeing the sharpest increase in recent months. Rising food prices have been a hot-button topic among many Israelis back home and abroad.

During my recent attendance to Kosherpalooza, a major kosher food market event at the Meadowlands Expo Center, several business owners shared a concerning outlook regarding the sharp rise in kosher and non-kosher food prices, especially among popular kosher products imported from Israel to the US.

In contrast to food and consumables, other sectors such as education, culture, entertainment, transportation, and communication services have seen prices ease in recent months, though it’s not certain how long this trend will continue as the war drags on, and those living in regions battered by the conflict are being forced to relocate.

Although May’s inflation data showed a slight decline in house prices, the decision by the central bank to leave rates uncharted has further amplified the long-term economic implications that war is having on all corners of Israel’s economy. Despite seeing inflation cool in recent months, economists warn that this could be a temporary outlook and that the geopolitical tension could create further economic uncertainty during the second half of the year.

While it’s uncertain what the coming months will look like, Israel’s property sector remains resilient in the face of adversity. Investors, buyers, and renters are continuously seeking to add a piece of Israeli property to their portfolio, despite prices reaching new record highs and interest rates sitting at their highest level in nearly four years.

Though there are still a lot of challenging conditions that await ahead, the Israeli property market remains strong and a sustainable capital security for many. However, many experts are beginning to question how long the market can handle these headwinds, and whether having government intervention sooner, rather than later, could help drive down prices, allowing the industry enough time to recover.