House prices are now falling in Israel
Lalaine C. Delmendo | October 15, 2020
The average price of owner-occupied dwellings in Israel fell by 3.22% during the year to Q2 2020 to ILS 1,526,000 (US$449,576), its worst contraction since Q2 2007, according to the Central Bureau of Statistics (CBS). When adjusted for inflation, prices fell 2.16%.
This was in contrast to an annual average price growth of 8.2% (6.9% in real terms) from 2009 to 2017. After falling slightly by 0.88% in 2018, dwelling prices rose again by 1.62% in 2019.
Quarter-on-quarter, nationwide dwelling prices fell by 5.86% (-5.58% inflation-adjusted) in Q2 2020.
Among Israel's major cities, Ashkelon saw the biggest house price fall during the year to Q2 2020, with prices falling by 4.85%. It was followed by Netanya (-3.7%), Tel Aviv (-2.27%), Haifa (-1.83%), and BeitShemesh (-0.87%). These declines were partly offset by strong y-o-y price growth in Holon (7.32%), Jerusalem (7.16%), Ramat Gan (6.34%), Beer Sheva (6.32%), and Bat Yam (4.99%).
The country's most expensive residential area is Tel Aviv, where the average price of owner-occupied dwellings was ILS 2,829,100 (US$ 832,934) in Q2 2020. It was followed by Kfar Saba at ILS 2,212,100 (US$ 651,279), Ramat Gan at ILS 2,194,600 (US$ 646,126), and Jerusalem at ILS 2,119,100 (US$623,898). Beer Sheva had the cheapest housing in Israel, with an average price of ILS 1,076,800 (US$317,028).
Israel has experienced dramatic house prices rises in the past decade (2011 excepted), despite domestic political uncertainty, security threats, and the global financial meltdown. Israel's house prices have risen by 118% (82% in real terms) from 2006 to 2017.
The main reason for the surge in house prices until 2017 was a supply shortage, due to low construction volumes. Other factors fueling the house price boom included the central bank's expansionary monetary policies, and the lack of alternative investment options.
“Real estate accounts for 19% of gross domestic product directly and another 13% indirectly,” says Elli Kraizberg, a professor at Bar-Ilan University. “Real estate accounts for not less than 40% of the public's total wealth.”
However since summer of 2011 when thousands of Israelis set up protest camps over worsening housing affordability, home prices have been top of the government's agenda.
- The government, which controls most of Israel's land, boosted dwelling starts to about 54,200 annually in 2015 to 2019 – the highest since 1997 – to address the supply shortage.
- The Finance Ministry increased purchase taxes and introduced an additional levy on owners of three or more apartments. As a result, investment transactions dropped sharply from 40% of total transactions in early 2015, to 15% recently.
- Since 2015, the government has intensified its sale of land at discounted prices to contractors, who must then sell apartments at below-market prices.
- Israelis who do not own a home may vie for apartments through a lottery system. Since its inception by end-2015, at least 60,000 households have won the lottery, but only 18,000 have actually exercised their right to purchase an apartment at a reduced price.
- In July 2017, the government approved a plan to strengthen the country's long-term rental market, including the introduction of tax breaks to encourage the construction of rental units.
As a result, house prices fell by 0.9% (-1.94% inflation-adjusted) in 2018 and increased by just a minimal 1.6% (1.2% inflation-adjusted) in 2019.
Israel's economy is projected to shrink by 5.9% this year, in contrast to the previous year's 3.4% growth and its first contraction since 2002, due to the coronavirus crisis, according to the IMF's October 2020 forecast. This is in line with the Bank of Israel's forecast, with real GDP projected to fall by 4.5% to 7%. The Bank of Israel kept its benchmark interest rate at 0.1% in August 2020, following a 15-basis point rate cut in April 2020.
Property in Tel Aviv and Jerusalem is very expensive, and rental yields are poor
Gross rental yields i.e., the rental return on a property if fully rented out, before all expenses, are poor in Tel Aviv and Jerusalem - almost at Monaco-like levels. Gross rental yields for apartments are near or under 3% (though some areas have higher yields).
This tends to support the popular view that property is somewhat overpriced in Israel.
Tel Aviv is a more expensive city to buy or rent property in generally than Jerusalem. In both cities prices have risen strikingly in the past few years. Prices in Tel Aviv range from US$10,000 to US$21,000 per square metre (sq. m.), whereas four years ago, we found the cost of a 120 sq. m. apartment to be typically around US$ 7,800 per sq. m.
These are the sort of prices that can be seen in Swiss cities of Geneva and Zurich, or in Canada’s Toronto and Vancouver.
Renting an apartment in Tel Aviv would cost you anywhere from US$27 per sq. m. to US57 per sq. m. per month. Renting in Jerusalem is likely to cost you US$19 to US$35 per sq. m. per month.
Despite Tel Aviv's higher purchasing price, it generally generates higher yields. The City Center (4.58%) and Ramat Aviv (3.84%) are the best-yielding areas in Tel Aviv. In Jerusalem, it is Rehavia (3%) and the City Center (2.84%).
Round trip transaction costs are low to moderate on residential property in Israel, with most costs paid by the buyer. See our Israel residential property transaction costs analysis and Round-trip transaction costs in Israel compared to the continent
Effective income tax rates are low in Israel
Rental Income: Rental income is taxed in Israel. Taxpayers can opt for a flat 10% tax on gross rent (without any deductions), or progressive income tax rates on net income.
Capital Gains: Most properties sold in Israel are exempt from capital gains tax. If the gains are taxable, the net gain is taxed at the standard income tax rates.
Inheritance: Israel has no inheritance tax.
Residents: Resident individuals are taxed on their worldwide income and capital gains at progressive rates.
Buying costs are low in Israel
Roundtrip transaction costs, i.e., the costs of buying and selling a property, are around 6.236% to 7.236% of the total property price. The buyer shoulders most costs. Buyers must check what is included in the purchase price because property in Israel is sold with just the bare walls, unless otherwise agreed. Buyers must also check first if the land is zoned for building, not for agriculture.
Research in this field is on-going.
Economic activity plunging; unemployment risingIn the second quarter of 2020, the Israeli economy shrank by an annualized rate of 29%, following a contraction of 6.8% in the first quarter, according to the Central Bureau of Statistics. It was the biggest contraction ever recorded, due to the coronavirus crisis. Over the same period:
- Private spending plunged 44.3%
- Fixed investment fell sharply by 30.3%
- Exports fell by 27.8% while imports dropped 39.5%
- Government spending increased 26%
As such, Israel’s economy is projected to shrink by 5.9% this year, in contrast to the previous year’s 3.4% growth and its first contraction since 2002, according to the IMF’s October 2020 forecast. This is in line with the Bank of Israel’s forecast, with real GDP projected to fall by 4.5% to 7%.
Economic growth averaged 3.8% annually from 2010 to 2019.
The pandemic has also caused unprecedented unemployment in the country. Unemployment stood at 4.9% in August 2020, up from 3.8% a year earlier and the highest level since April 2016, according to the CBS.
The total number of unemployed persons in Israel was about 201,100 in August 2020, the highest since March 2016.
In 2019, higher state expenses and lower tax collection have pushed the budget deficit to about 4.5% of GDP, slightly up from the previous year’s 4.3% and the highest level since 2012. The government predicts that the deficit will surge to about 13% of GDP this year, due to the introduction of several stimulus plans.
Similarly, the debt-to-GDP ratio would rise to about 76% this year and to 78% in 2021, sharply up from 59.9% in 2019.
Consumer prices fell by 0.7% in September 2020 from a year earlier, its sixth consecutive month of negative inflation, amidst the ongoing health crisis. Inflation averaged 0.6% from 2012 to 2019.
After three elections and nearly 18 months of political deadlock, Israel has sworn in Prime Minister Benjamin Netanyahu and former rival Benny Gantz in May 2020 in a power-sharing deal. The two parties agreed to form a national unity government to deal with the Covid-19 crisis. Though recently thousands of demonstrators took to the streets to call for the resignation of Netanyahu over the corruption charges against him and for his handling of the pandemic.