Israel's housing demand reviving
Lalaine C. Delmendo | January 25, 2022
Despite the coronavirus crisis, Israel's housing market remains robust, buoyed by strong fundamental demand. In the first three quarters of 2021, the total number of dwelling transactions in Israel surged by almost 39% y-o-y to 39,363 units, following growth of 20% in 2020 and 48% in 2019, according to the Central Bureau of Statistics (CBS). Transactions soared 55.5% in Tel Aviv and by 25.5% in Jerusalem.As a result of surging demand, coupled with weak residential construction, house prices continue to rise. The average price of owner-occupied dwellings in Israel rose by 6.9% during the year to Q3 2021 to ILS 1,680,400 (US$ 540,683), its second biggest y-o-y increase since Q2 2015. When adjusted for inflation, prices rose 4.6%.
Yet quarter-on-quarter, nationwide dwelling prices fell slightly by 0.3% (-1.1% inflation-adjusted) in Q3 2021.
Among Israel's major cities, Netanya saw the biggest house price growth during the year to Q3 2021, with prices rising by 38.1%. It was followed by Beit Shemesh (18.5%), Ramat Gan (17%), Bat Yam (12%), Kfar Saba (10.2%), Rishon Lezion (8.3%), and Tel Aviv (7.5%). Modest to minimal house price rises were seen in Bnei Brak (5.8%), Ashkelon (5.6%), Rehovot (4.9%), Jerusalem (4.5%), Holon (4.3%), Ashdod (2.4%) and Petah Tiqwa (1.9%).
Only Beer Sheva and Haifa recorded house price falls during the year to Q3 2021, of 1.3% and 5.3%, respectively.
The country's most expensive residential area is Tel Aviv, where the average price of owner-occupied dwellings was ILS 3,443,200 (US$ 1,107,880) in Q3 2021. It was followed by Ramat Gan at ILS 2,475,600 (US$ 796,546), Kfar Saba at ILS 2,378,800 (US$ 765,400), and Netanya at ILS 2,369,500 (US$ 762,407). Beer Sheva had the cheapest housing in Israel, with an average price of ILS 1,031,800 (US$ 331,990).
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 2020 – 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.
- In October 2021, the government unveiled its plan to crack down on unauthorized vacation rental apartments and bring back the purchase tax on apartments to 8%, as part of its comprehensive plan to cool the housing market.
As a result, house prices fell by 0.9% (-1.9% inflation-adjusted) in 2018 and increased by just a minimal 1.6% (1.2% inflation-adjusted) in 2019. However in 2020, the housing market strengthened again despite the pandemic, with prices rising by 5.5% (6.2% inflation-adjusted).
Israel's economy is projected to expand strongly by 7.1% in 2021, fully offsetting the 2.2% contraction seen during 2020 and the biggest growth since 2000, according to the IMF's October 2021 forecast.
Analysis
of Israel Residential Property Market »
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.
Economy stabilizing; unemployment remains high
The pandemic has caused quite high unemployment - the seasonally-adjusted unemployment rate was % in October 2021, up from 4.7% the previous year and 3.6% two years ago, according to the CBS.Nevertheless the Finance Ministry projects 7.1% GDP growth this year and another 4.7% in 2022. in Q3 2021, the Israeli economy grew modestly by an annualized rate of 2.4%, following growth of 13.7% in Q2 and a decline of 2.2% in Q1, according to the Central Bureau of Statistics. Over the same period:
- Private spending rose slightly by 0.7%, sharply down from 33.5% growth in Q2
- Fixed investment increased 14.8%, faster than the 5.6% growth in the previous quarter
- Exports rose by 7.5% while imports increased modestly by 2.7%
- Government spending declined 2.3% in Q3, in contrast to a 1.3% increase in Q2
Economic growth averaged 3.8% annually from 2010 to 2019.
The budget deficit surged to 11.7% of GDP in 2020, sharply up from 3.7% in 2019, 4.3% in 2018 and 2.1% in 2017 - the highest level since 1996.
The shortfall is projected to fall to 7% of GDP this year and to 3.4% of GDP in 2022, as the situation gradually improves. The debt-to-GDP ratio soared to 71.1% in 2020, sharply up from 58.5% in 2019 and 59.3% in 2018.
The annual inflation rate slowed to 2.3% in October 2021 from an eight-year high of 2.5% in September 2021, and still within the BOI’s target range of 1% to 3%. Inflation averaged 0.4% from 2012 to 2020.
In June 2021, a new coalition led by Naftali Bennett from the Yamina party and Yair Lapid from Yesh Atid obtained the required votes – 60 out of 120 Knesset members – in favour of the new government. The coalition agreement includes a rotation government, whereby Bennett would serve as Israel’s PM until 2023, after which Lapid would assume the role until 2025.
Yet political analysts predict that the new government, which consists of eight parties ranging from left to the far right, is very fragile and could easily break due to enormous ideological differences. For the first time, a Palestinian party, the United Arab List, is also a member of the coalition government.