Israel's decade-long house price boom is now over, as government cooling measures intensify
Lalaine C. Delmendo | December 20, 2018
It was the first y-o-y decline since Q2 2007.
On a quarterly basis, nationwide house prices fell by 0.15% (-1.14% in real terms) during the latest quarter.
The area covered by the Center and Jerusalem Periphery Towns saw the biggest price decline during the year to Q2 2018, with prices falling by 4.37%. It was followed by Tel Aviv with house price fall of 3.72%.
On the other hand, Haifa saw the biggest house price increase during the year to Q2 2018, with prices rising by 2.66%. Other districts that experienced minimal year-on-year house price rises included the Southern district (1.83%), Jerusalem (1.53%), and the Northern district (0.9%).
The country's most expensive residential area is Tel Aviv, where the average price of owner-occupied dwellings was ILS 2,176,700 (US$610,053) in Q2 2018. It was followed by Jerusalem at ILS 1,882,400 (US$527,571), and the Center at ILS 1,746,400 (US$489,455). The North had the cheapest housing in Israel, with an average price of ILS 927,500 (US$259,946).
Israel has experienced dramatic house prices rises in the past nine years (with the exception of 2011), despite domestic political uncertainty, security threats, and the global financial meltdown. In fact, house prices have risen by 112% (77% in real terms) from 2006 to 2016.
The main reason for the surge in house prices until 2016 was a supply shortage, due to low construction volumes. Other factors fuelling 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 more than 53,000 annually in 2015 and 2016 – 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% in February 2017, according to the BOI.
- 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 that will award a record 15,000 new homes later this year.
- 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.
Israel's economy is expected to expand by 3.7% this year, after growing by 3.5% in 2017, 4% in 2016, and 2.5% in 2015, according to the BOI.
The Bank of Israel kept its benchmark interest rate at a record low of 0.1% in August 2018.
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.
Strong economic growth; very low unemploymentThe Israeli economy expanded by 3.5% in 2017, after annual growth rates of 4% in 2016, 2.5% in 2015, 3.2% in 2014, 4.4% in 2013, 2.4% in 2012, and 5.1% in 2011, according to the BOI.
The economy is forecast to expand by around 3.7% this year, according to the BOI.
Unemployment stood at 4.2% in July 2018, slightly up from 4.1% a year earlier, according to the CBS. The country’s annual unemployment rate has been generally declining since 2003. Unemployment is expected to fall further to 3.3% in 2018, from 4.3% in the previous year, according to the BOI.
Inflation is expected to be 1.3% this year, up from 0.2% in 2017, -0.5% in 2016, from -0.6% in 2015, 0.5% in 2014, 1.5% in 2013, 1.7% in 2012, and 3.5% in 2011, based on the forecast from the BOI.
In 2017, the country recorded a budget deficit of ILS28 billion (US$7.67 billion), representing just 2.2% of GDP – the second smallest deficit since 2008, according to the Finance Ministry. The country is expected to post a budget shortfall of 2.9% of GDP this year.
Israel’s public debt was equivalent to 60.8% of GDP in 2017, down from 62.3% in 2016, 64% in 2015, 66.1% in 2014, and 67.1% in 2013, according to the BOI. The country’s public debt has been falling since 2009.