House prices continue to rise strongly in Israel

Israel’s house prices continue to rise strongly, despite falling residential property transactions. During 2022, the total number of dwelling transactions in the country fell by 13.8% to 82,298 units from a year earlier, in sharp contrast to a y-o-y increase of 23.4% in 2021, according to figures from the Central Bureau of Statistics (CBS). Demand remains weak this year with transactions plunging by almost half in Q1 2023 from a year earlier, to just 13,397 units.

Surprisingly, house prices continue to rise strongly. The average price of owner-occupied dwellings in Israel rose by 9.34% to ILS1,969,800 (US$531,933) in Q1 2023 from a year earlier, its eleventh consecutive quarter of y-o-y increase. When adjusted for inflation, prices actually increased by a modest 3.95% over the same period.

Israel’s house price annual change

Quarter-on-quarter, nationwide dwelling prices were up slightly by 0.96% in Q1 2023 (unchanged in real terms).

Among Israel’s major cities, Ramat Gan saw the biggest house price growth during the year to Q1 2023, with prices rising by a huge 27.9%. It was followed by Beit Shemesh (27.4%), Haifa (25.5%), Petah Tigwa (18.7%), Rehovot (17.7%), Bat Yam (16.8%), Rishon Lezion (14%), Netanya (13.9%), and Ashdod (10.3%). More moderate house price increases were seen in Tel Aviv (8.8%), Kfar Saba (8.1%), Bnei Brak (6.7%), Holon (6.1%), Beer Sheva (5.2%), and Jerusalem (4.5%).

Only Ashkelon recorded a minimal house price fall of 0.8% y-o-y in Q1 2023.

The country’s most expensive residential area is Tel Aviv, where the average price of owner-occupied dwellings was ILS4,236,900 (US$1,144,149) in Q1 2023. It was followed by Herzlliya with house prices at an average of ILS3,477,700 (US$939,132), Ramat Gan at ILS3,276,300 (US$884,745), and Kfar Saba at ILS2,915,100 (US$787,205).

Beer Sheva had the cheapest housing in Israel, with an average price of ILS1,173,100 (US$316,789).

Israel has experienced dramatic house price 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 the 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 58,100 annually from 2015 to 2022 – the highest since 1996 – 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 in 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.
  • From April 2022 to May 2023, the country’s central bank raised its key interest rates ten times from a record-low of 0.1% to 4.75% to rein in inflationary pressures. This effectively increased the borrowing costs for homebuyers.

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, the housing market strengthened again in 2020-21 despite the pandemic, with prices rising by a cumulative 14.4% (12.4% inflation-adjusted). During 2022, house prices rose further by 10.43% (4.96% inflation-adjusted), despite plunging demand.

HOUSE PRICES IN ISRAEL, ANNUAL CHANGE (%)
Year Nominal Inflation-adjusted
2008 4.10 -0.48
2009 22.35 18.14
2010 17.04 14.22
2011 0.04 -2.40
2012 5.82 4.12
2013 7.38 5.40
2014 7.21 7.42
2015 5.99 6.88
2016 4.97 5.26
2017 3.04 2.73
2018 -0.88 -1.94
2019 1.62 1.18
2020 5.50 6.24
2021 8.44 5.79
2022 10.43 4.96
Sources: Israel Central Bureau of Statistics, Global Property Guide

The Israeli economy expanded by a robust 6.4% during 2022, following a growth of 8.6% in the prior year, as consumer spending and business operations return to their pre-pandemic levels. The economy continues to grow this year, albeit at a slower pace, amidst rising interest rates and heightened global economic uncertainty. In Q1 2023, the country’s real GDP growth rate stood at an annualized 3.2%, following expansions of 5.3% in Q4 2022, 1.9% in Q3, and 6.4% in Q2.

The  Bank of Israel (BOI) expects the country’s economic growth to moderate to 3% in 2023 and 2024. It is in line with the IMF’s forecast of a 2.9% growth for Israel this year.

A brief history of Israel’s housing cycle

During the global economic crisis, Israel enjoyed amazing double-digit house price rises. In Tel Aviv, housing prices rose by a whopping 41% between Q1 2008 and Q4 2009. Only the Northern district registered a single-digit house price growth of 4.7%. Israel’s average home price rose by 24.2% over the same period.

Despite Bank of Israel rate hikes until the key rate reached 3.25% in June 2011, average house prices in Israel rose by almost 13% from Q1 2010 to Q2 2011.

One result was a social protest movement, which began in July 2011 with a Facebook group protesting Israel’s rising cost of living (specifically housing costs) as well as the worsening condition of public services.

CHANGES IN AVERAGE PRICE OF DWELLINGS (%)
  Israel Tel Aviv Center South Jerusalem North Haifa
Second Intifada (Q3 00-Q2 03) -6.47 -16.60 6.77 11.96 -3.86 1.57 -10.34
(Q2 03-Q1 06) 28.09 25.50 10.21 -0.78 36.77 0.07 -0.68
Israel-Hezbollah War (Q1-Q4 06) -11.60 -12.60 -12.12 8.93 -6.05 -8.00 -10.26
(Q4 06-Q4 07) 4.90 22.37 16.22 6.84 5.05 -4.40 -8.47
Global economic crisis (Q1 08-Q4 09) 24.20 41.27 34.61 29.10 20.13 4.66 29.85
(Q1 10-Q2 11) 12.99 8.26 20.34 15.26 14.23 51.46 23.54
Israeli social justice protests (Q3 11-Q1 12) 0.53 -3.06 0.21 2.77 -1.22 5.13 9.82
(Q2 12-Q4 17) 31.60 40.70 34.20 33.90 29.70 31.50 35.50
Govt cooling measures (Q4 17-Q4 19) 7.00 -17.40 14.40 6.20 -20.20 -0.80 6.80
Covid-19 pandemic (Q1 2020-Q4 2021) 8.96 10.98 9.56 10.70 12.05 8.17 8.89
Economic recovery (Q1 2022-Q1 2023) 9.34 7.68 19.66 0.28 18.40 15.93 13.29
Sources: Israel Central Bureau of Statistics, Global Property Guide

Nationwide house prices rose by a meager 0.53% from Q3 2011 to Q1 2012, with Tel Aviv and Jerusalem house prices falling by 3.06% and 1.22%, respectively. 

House prices in the country then rose 31.6% from Q2 2012 to Q4 2017, with all districts registering double-digit increases over the period. Israel’s housing market has been unscathed by the Syrian civil war.

However, Israel’s housing market started to slow by the end of 2017, after the government intensified its market-cooling measures. In 2018-19, house prices fell sharply in Jerusalem (-20.2%) and Tel Aviv (-17.4%). Yet nationwide house prices continued to rise by 7%, as the sharp price decline in the two major cities was offset by the continued rise in house prices in other districts.

House prices have been continuously increasing since, despite the Covid-19 pandemic. During the onset of the health crisis from Q1 2020 to Q4 2021, nationwide house prices rose by 8.96%. Jerusalem saw a house price growth of 12.05% while Tel Aviv prices increased 10.98%. From Q1 2022 to Q1 2023, house prices in Israel rose further by 9.34%, despite a sharp decline in property demand.

Israel Average Prices of Owner-Occupied Dwellings graph

Residential property sales falling

Demand is now slowing. During 2022, the total number of dwelling transactions in Israel fell by 13.8% to 82,298 units from a year earlier, in sharp contrast to a y-o-y increase of 23.4% in 2021, according to CBS. Similarly, new dwellings sold also plunged 29% to just 40,973 units last year as compared to 57,726 units sold in 2021.

Israel New Dwellings Sold graph

The weakness of demand continued early this year. In the first quarter of 2023, total dwelling transactions plummeted by almost half to just 13,397 units sold as compared to 26,673 units in the same quarter last year.

In Q1 2023, all districts saw a sharp decline in residential property transactions.

  • In Tel Aviv, housing transactions were down by nearly 50% y-o-y to just 1,882 units in Q1 2023.
  • In the Centre, transactions fell by a huge 62% y-o-y to 2,566 units.
  • In Haifa, transactions plummeted by 47.5% y-o-y to 2,155 units.
  • In the Northern District, transactions declined by a huge 53.5% y-o-y to 1,348 units.
  • In Jerusalem, transactions plunged by 42.8% y-o-y to 1,430 units.
  • In the Southern District, transactions fell by 35.9% y-o-y to 3,710 units.

 As of May 2023, there were a total of 57,282 new dwellings available for sale in the market, up by 25.4% from a year earlier. At the current sales rate, this implies that the stock of new dwellings is equivalent to about 23.6 month’s supply, as compared to just 12.4 months’ supply in the previous year.

Wide regional variations in residential construction activity

During 2022, the total number of dwelling starts in Israel rose by 5.2% y-o-y to 67,479 units, following an increase of 13.6% in 2021, based on figures from CBS. It was the highest level recorded since 1995.

Though dwelling starts by the district showed wide variations:

  • In Tel Aviv, the number of dwellings started to fall by 10.3% y-o-y to 13,597 units in 2022, in contrast to a 33% increase in 2021.
  • In the Central district, dwelling starts increased 18.2% y-o-y to 16,953 units, following a 7.7% decline in the prior year.
  • In Haifa, dwelling starts fell by 23.6% y-o-y to 5,416 units last year, in contrast to a 46.7% increase in 2021.
  • In the Northern District, dwelling starts surged 23.9% to 9,013 units in 2022 from a year earlier, a sharp acceleration from a 1.6% growth in the prior year.
  • In Jerusalem, the number of dwellings started to increase strongly by 28.1% y-o-y to 7,600 units last year, after rising by 25.8% in 2021.
  • In the Southern District, dwelling starts rose by 7.6% y-o-y to 12,341 units, an improvement from a slight decline of 0.1% in 2021.
  • In the Judea and Samaria area, dwelling starts fell by 11.7% to 2,558 units in 2022 from a year earlier, after surging by 118.6% in 2021.

 Similarly, dwelling completions nationwide increased by 11.4% to 52,424 units in 2022 as compared to a year ago, following annual declines of 6.3% in 2021 and 5.7% in 2020.

Jerusalem saw the biggest increase in dwelling completions of 101.2%, followed by the Northern district (40.9%), Southern district (13%), Tel Aviv (10.6%), and Central district (10.3%). In contrast, Haifa and Judea and Samaria areas registered declines of 31.9% and 29.7%, respectively.

Residential construction activity showed mixed results in early-2023. Dwelling starts fell by 25% y-o-y to 14,981 units in Q1 2023 while completions increased 2.8% to 11,781 units.

Israel Residential Construction graph

 Housing loan rates rising sharply, amidst successive key rate hikes

In July 2023, the Bank of Israel (BOI) kept its key interest rate unchanged at 4.75%, amidst moderating consumer price increases. This follows ten consecutive rate hikes of a cumulative of 465 basis points since April 2022 to rein in inflationary pressures.

As such, the BOI key rate remains at its highest level since December 2006.

“Economic activity in Israel is at a high level and is accompanied by a tight labor market, although there is some moderation in a number of indicators. Inflation is broad and remains high. With that, in recent months inflation appears to be slowing,” said the BOI. “Therefore, the Monetary Committee decided to leave the interest rate unchanged, but sees a real possibility of having to raise the interest rate in future decisions, if the inflation environment does not continue to moderate as expected.”

Israel BOI´s Key Interest Rate Percentage graph

As a result, interest rates for housing loans are also rising fast. In June 2023, the average interest rate of CPI-indexed housing loans (fixed, variable, and zero coupons) to households rose to 3.59%, up from 2.72% a year earlier and 2.12% two years ago, according to figures published by the BOI.

Over the same period:

  • Fixed-rate, indexed to CPI: 3.34%, up from 2.58% in the previous year and 2.28% two years ago
  • Fixed-rate, not indexed: 5.04%, up from 4.22% a year earlier and 3.06% two years ago
  • Variable and fixed rate, indexed to foreign currency: 6.54%, sharply up from 3.74% in June 2022 and 2.33% in June 2021

Israel Interest Rates on Housing Loans graph

New housing loans falling rapidly

Israel’s mortgage market has actually expanded to more than 31% of GDP in 2022, up from 26.5% of GDP in 2019 and 24.5% in 2015. However, this is still considered a modest level of borrowing in a developed country.

During 2022, total housing loans outstanding increased strongly by 14.24% y-o-y to ILS 551.3 billion (US$148.9 billion). This was higher as compared to the annual average growth of 9.2% from 2012 to 2021.

Likewise, the total number of existing housing loans exceeded 1 million in 2022, up by 4.9% from the previous year.

However with rapidly rising interest rates, new housing loans drawn are now falling. In the first half of 2023, the total volume of new housing loans to households dropped sharply by 47% to ILS 36.54 billion (US$9.87 billion), in contrast to y-o-y growth of 33.4% in H1 2022 and 39.6% in H1 2o21, based on figures from the BOI.

Israel Housing Loans Outstanding graph 1

Will rising interest rates and growing household indebtedness threaten financial stability?

Despite rising interest rates and increased household indebtedness, Israel’s mortgage market remains fundamentally healthy. The measures of risk inherent in housing debt have risen dramatically in recent years, but they are still relatively low compared to other countries.

“The ratio of household debt to GDP has risen almost continuously since 2007 and at an even faster pace since 2014. It reached a level of 45 percent in mid-2022, which is a historical record, although again it is not high relative to other countries, and since September 2022 it has even dropped somewhat,” said the BOI in its H2 2022 Financial Stability Report.

Moreover, while housing credit constitutes a significant portion of total household credit in Israel, such is viewed as conservative as it is generally secured by collateral - the home.

However, the central bank should remain prudent due to the dramatic increase in credit risks in the financial market in recent months. In fact, mortgages have reached a historically high level and the proportion of relatively high-risk mortgages has increased sharply since end-2021, according to the BOI.

This is supported by the International Monetary Fund (IMF), which cautioned that the continuous strong house price growth in recent years has strained affordability and an increasing number of low-income borrowers are vulnerable to rising interest rates and house price shocks.

“Average household indebtedness in Israel—about 44 percent of GDP—is low compared to the rest of Europe, but lower-income households and those that purchased in overvalued areas or at the maximum of their budget are particularly vulnerable to price shocks, rising interest rates, and tightening financial conditions with potential spillovers to the real economy,” said the IMF in its consultation report for Israel published in June 2023.

Housing credit growth in Israel is expected to slow further during the remainder of the year, due to the continued increase in interest rates and deteriorating purchasing power of households and consumers.

Israel Housing Loans Outstanding graph 2

Poor rental yields; expensive rental apartments

Over the past two decades, the country’s homeownership rate has been gradually declining, and more households are renting, due to the shortage of affordable housing. Currently, the homeownership rate is about 64.6%, down from 66.5% in 2018, 68.8% in 2008, and 73% in 1995.

Gross rental yields i.e., the rental return on a property if fully rented out, before all expenses, are poor in Israel - almost at Monaco-like levels. Gross rental yields for apartments are near or under 3% (though some areas have higher yields), according to recent research conducted by the Global Property Guide in November 2022.

This tends to support the popular view that property is somewhat overpriced in Israel.

By City:

  • In Tel Aviv, the gross rental yields stood at 3.05% last year
  • In Jerusalem, apartments generally offer an average rental yield of 2.72%
  • In Haifa, the average rental yield is higher at 3.68%
  • In Be’er Sheva, one can earn an average yield of 3.74%
  • In Ra’anana, rental apartments give an average yield of 2.71%

 Tel Aviv is a more expensive city to rent property in generally than Jerusalem. In Tel Aviv, renting a two-bedroom apartment would cost you anywhere from US$2,390 to US$4,244 per month in 2022. On the other hand, renting in Jerusalem for a similar property is likely to cost you US$1,286 to US$1,846 per month.

Israel’s economy remains fundamentally strong, with inflation moderating

The Israeli economy expanded by a robust 6.4% during 2022, following a growth of 8.6% in the prior year. The economy continues to grow this year, albeit at a slower pace, amidst rising interest rates and heightened global economic uncertainty. In Q1 2023, the country’s real GDP growth rate stood at an annualized 3.2%, following expansions of 5.3% in Q4 2022, 1.9% in Q3, and 6.4% in Q2.

The  Bank of Israel (BOI) expects the country’s economic growth to moderate to 3% in 2023 and 2024. It is in line with the IMF’s forecast of a 2.9% growth for Israel this year.

Israel posted an average economic growth of 4.2% annually from 2010 to 2019, before contracting by 1.9% in 2020 due to the Covid-19 pandemic.

Israel GDP Growth and Inflation graph

The country registered a budget surplus equivalent to 0.6% of GDP in 2022, a sharp improvement from the shortfalls equal to 4.4% of GDP in 2021 and 11.3% of GDP in 2020, as the government introduced a NIS 196.3 billion multi-year economic aid spending plan during the onset of the pandemic. It was the first budget surplus recorded in 35 years.

The Finance Ministry targets a budget deficit of 0.9% of GDP this year and 0.8% in 2024.

The debt-to-GDP ratio fell to 60.9% in 2022, sharply down from 68% in 2021 and 71.7% in 2020 but still slightly higher as compared to its 2019 pre-pandemic level of 59.5%.

Consumer price increases are moderating. In June 2023, the annual inflation rate eased to 4.2%, down from 4.6% in the previous month and the lowest since May 2022, thanks to the central bank’s successive interest rate hikes, according to figures from the CBS. However, it remains far higher than the average inflation rate of just 0.5% from 2012 to 2021 and still above the BOI’s target range of 1% to 3%.

The labor market remains robust. In June 2023, the nationwide unemployment rate was 3.5%, unchanged from the previous month but slightly up from 3.4% in the same period last year, according to the CBS Labour Force Survey Data for June 2023.

“The labor market remains tight and in a full employment environment, but the downward trend in the job vacancy rate continues,” said the central bank.

Israel Unemployment Percentage graph

Sources: