The State of the Israeli Real Estate Market

Jerusalem

The current state of the Israeli real estate market is a hot topic for local and international investors. Of all the regions, none are more desirable than Tel Aviv, Herzliya Pituach, and Jerusalem. As arguably the most desirable city in Israel, Tel Aviv is often used as a benchmark when comparing differences in housing prices with the rest of the country. In the 1980s, Tel Aviv housing prices were 56% higher than the prices of comparable homes in all other areas of Israel. In 2019, that difference has shot up to 120% (CBS (Central Bureau of Statistics)).

In the 1980s, the Israeli economy was ravaged by hyperinflationary pressures. 1988 was a watershed year in Israel, as it marked a massive wave of immigration from the former Soviet Union. This facilitated the rise in housing prices, particularly in Tel Aviv and surrounds. The widening gap between Israel’s premier city and the rest the country was stark, and remains to this day. By 1999, Israel’s tech bubble helped the real estate market to boom, but deflation soon followed. After the bubble burst, the differential between Tel Aviv and the rest of the country dropped to 41%. Tel Aviv’s resilience allowed it to sustain cyclical economic movements.

While Tel Aviv has rebuffed recessionary pressures, downturns have persisted in cities and towns outside of Tel Aviv. Real estate prices throughout the country began to rise in 2009 despite government efforts to try and curb runaway price increases. Many government ministers have failed to prevent housing prices from rising in Israel, and now the average price for a home in Tel Aviv is 150% greater than the average home price in Jerusalem, and 250% greater than the average home price in Haifa. Homeowners can expect to shelve out 2.7 million NIS ($745,000) on average in Tel Aviv.

Why Are Israel’s Real Estate Prices Rising?

Several areas in Israel are experiencing rising prices, particularly Herzliya Pituach, Tel Aviv, and Jerusalem. Foreign buyers of real estate in Israel are increasingly interested in these lucrative markets which is seen a virtual doubling of prices since 2009.  There are several reasons why real estate is booming, notably the unprecedented growth of Israeli high-tech, increased tourism, and a desire to purchase real estate in Israel as a result of increasing anti-Semitism in South America and across Europe. The market for luxury real estate is particularly strong, and in this vein, Jerusalem and Tel Aviv are seeing increasing interest. Real estate investors are fully behind this luxury property market boom. In terms of pricing, a luxury home is one which costs between $2 million and $15 million on average. These prices are supported by increasing tourism, and strong demand for condominiums, apartments, and homes.

Israel’s status as a start-up nation is without question. No country boasts more start-ups per capita than Israel, and this results in massive inflows of venture capital to the Jewish state. Besides for a veritable smorgasbord of local tech companies, Israel is also home to research centers for major Silicon Valley companies such as Facebook, Google, and Apple. Consider that Intel Corporation recently spent $15 billion purchasing Israel’s Mobileye, and Google bought Waze for a whopping $1 billion. The success of the technology sector has fuelled a massive inflow of FDI into Israel which is helping to drive up real estate prices. This is evident in Israel’s major metropolitan enclaves where luxury hotels, condominiums and infrastructure development is now taking place.

The issue of anti-Semitism is being fuelled by the BDS movement in Western countries, and openly hostile demonstrations against Israel and Jews in Europe. As a result of this, waves of immigration to Israel are occurring. Many of these people in Europe, South Africa, and the Americas are bringing generations of skills, education, and capital with them. This is particularly true in countries like Austria, Germany, France, Belgium, Argentina, Brazil, and South Africa. Rising anti-Semitism has many roots, not least of which is the unresolved status of the Palestinians in Gaza and the West Bank, and Jewish settlements. In the UK, anti-Semitism is being driven by Jeremy Corbyn – an outspoken anti-Israel politician. For all of these reasons, Jews across Europe, and beyond, are purchasing second homes in Israel as insurance against these new realities.

Source: First Israel Mortgages Current Interest Rates

Multiple surveys have been conducted into what Jews in the UK are doing vis-à-vis fears of rising anti-Semitism. A large number of English Jews are now buying homes in Israel, with increased capital inflows evident after the last general elections in the UK where Corbyn fared much better than expected. These insurance policy purchases for Jews are part of a much larger global trend helping to drive the Israeli real estate market. Government has been unable to stem the demand, and even a 3% higher purchase tax for foreign buyers has not helped to cool sentiment. The fact that Israel represents a safe-haven against anti-Semitism is seen as much more important than the higher purchase tax imposed by the government.

The Israeli Tourism Market Is Booming

Israel is home to some of the world’s finest luxury hotels. Tel Aviv routinely ranks in the top 10 places to visit in the world. With so many luxury hotels opening up across Israel, this is helping to form a booming tourism culture in the country. Most of the tourists coming to Israel are from Europe, the US, the UK and Russia. Their valuable foreign currency is driving demand for a niche market of luxury accommodations and amenities in top-notch locations. While many are hoping that the boom will continue, there are signs that supply is starting to meet demand and prices are stabilizing.

Image Credit: Central Bureau Of Statistics

There is enough evidence to suggest that the housing boom may be slowing, thanks to government intervention. During Q2 2018, the average home price in Israel dropped by 0.49%, following an annual price increase of 4.48% in Q2 2017. Big declines were seen in Jerusalem and surrounds, and the center of Israel. Northern towns and cities like Haifa saw increased prices during the year to Q2 2018, with an uptick of 2.66%. The cheapest housing prices in Israel are found in the North along the borders with Syria and Lebanon.

Home values in these areas averaged around 927,500 NIS. Over the past decade, house prices have increased dramatically in the country, with exception of 2011 where there was a downturn. The supply shortage fueled price rises at the time, but now builders are meeting demand and prices are stabilizing. According to industry analysts, the real estate market makes up 19% of GDP directly and 13% indirectly. And it also makes up 40% of Israeli society’s total wealth.

(Tradingeconomics.com | Bank of Israel)

Most land in Israel is owned by the government. Various government initiatives aimed at penalizing property owners such as additional levies on those who have 3+ apartments, resulted in a sharp decline in total investment transactions between 2015 and 2017. The government is also working hard to facilitate the construction of rental accommodation at reduced prices. The Bank of Israel is helping to keep the real estate market alive with record low interest rates of 0.1% recorded in August 2018.

The bank lending rate in Israel is currently at 3.59%, unchanged from its February figure. Overall though, the mortgage market in the country is sound. Between 2007 and 2017, the number of housing loans increased from 7.3% per year, except 2015 when it dropped 3.9% from 2014. The low interest-rate in Israel and lower unemployment rates mean that people are not struggling to pay their mortgages. Fortunately, the average Israeli household still has a surplus of assets over liabilities, helping to prop up the mortgage market in the country.

About the Author
Ofir Eyal Bar, a successful businessman and Real Estate investor. With more than 15 years of experience in global financial markets as a real estate entrepreneur and investor. Ofir’s experience and go-getter approach has rewarded him with a wide variety of successful real estate investments. Ofir was born in Israel and owns several properties, including residential and commercial real estate properties in Israel as well as London."
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