House price uncertainty continues in Israel

Last Updated: Aug 08, 2008

House price uncertainty continues in Israel

The average house price in Israel barely rose in the year to end-first quarter 2008, largely as a result of political uncertainties and the global financial crisis.

The average price of owner-occupied dwellings in Q1 2008 was only 0.23% up from a year earlier, at Israeli New Shekel (ILS) 734,100 (US$211,036) ,. When adjusted for inflation, the average price actually fell 3.4% over the same period, according to the Central Bureau of Statistics.

House prices had risen 28% (24.6% in real terms) between Q2-2003 and Q1-2006, due to the economic stability brought by the success of the electronics industry, investments and financial aid from the US, from wealthy Jews abroad, and by the improved security situation.

However the war between Israel and Hezbollah, which erupted in July 2006, rocked an already volatile political environment. Consumer and investor confidence dropped. Both supply and demand for housing fell.

The average price of houses fell 11.6% from the peak level of ILS 793,800 (US$228,198) in Q1 2006 to ILS 701,700 (US$201,722) in Q4 2006. Although the war formally ended in August 2006, the lingering uncertainty over the peace and order situation led to a weakness in the housing market.

During 2007, the housing market recovered slightly with 4.9% y-o-y price increase (1.5% in real terms). However, the recovery was short lived due to rising tensions with Iran and with the Hamas-controlled Gaza Strip. Israel’s continued expansion of Jewish settlements in East Jerusalem and in the West Bank also increased tension.

Tel Aviv, affected the worst by conflict

As Israel’s economic centre and the location of most foreign embassies, Tel Aviv’s housing market suffers the most whenever the country is in conflict. With the Israel-Hezbollah war, house prices fell 12.6% from Q1 to Q4 2006. In contrast, the Southern district, relatively unscathed by the conflict, registered an 8.9% price increase over the same period.

The district of Haifa in northern Israel, which shares a border with Hezbollah-controlled districts in southern Lebanon, was heavily damaged by rocket attacks during the conflict. The average house price in the district fell 10.3% during 2006.

Similarly, when the violent Second Intifada erupted in September 2000, average house prices in Tel Aviv fell 16.6% between Q3 2000 and Q2 2003. Over the same period, the average price in Israel fell 6.5%, while house prices in Jerusalem fell only 3.9%.

While property prices in other districts have partially recovered since the cessation of conflict at the end of 2006, house prices in Haifa district have continued to fall. The average price of dwellings in Haifa fell 21% from Q4 2006 to Q1 2008.

In Jerusalem, the capital of both Israel and Palestine, the price of dwellings dropped 6% during 2006.

Immigration and housing supply

The state of Israel has continuously encouraged the ‘return’ of Jews living abroad to the “Promised Land”, despite the fact it was already occupied by the Palestinians. The government has supported the needs of the new immigrants, including providing aid for housing and employment.

After the collapse of the Soviet Union in the early 1990s, more than half a million Jewish immigrants moved to Israel. An annual average of 200,000 Jews migrated to Israel during 1990-1991, a sharp rise compared to an annual average of 20,000 immigrants in the 1980s.

From 1992 to 1998, around 60,000 - 80,000 Jews migrated to the country every year. The influx of immigrants from the Soviet Union rose again in 1999, though it was less than in 1990-1991, largely due to the financial crisis of the Soviet Union in the second half of 1998.

Starting 2001, a gradual drop in the number of immigrants took place. From 44,633 Jewish immigrants in 2001, the figure dropped to 19,700 in 2007.

The increase in demand for housing units in the early 1990s led to a surge in house prices. In response, the number of dwellings completed rose to 70,120 units in 1992, 251% up on the 19,960 units completed in 1990.

In 1993-1995, housing construction slowed, with an average of 38,000 units completed annually. The number of dwellings completed rose again to 68,364 units in 1997. Since 1998, the number of dwellings completed has been declining. From 54,000 units in 1998, housing completions were down to around 28,000 units in 2007.

Housing construction as a political tool

In June 2002, the government started the construction of barriers to separate Israeli Jews from the Palestinian communities in the West Bank. The separation fence (about 60 metres high) prevents the uncontrolled entry of Palestinians into Israel.

This policy was condemned internationally because it was seen as a territorial expansion by Israel. The fence enclosed parts of the West Bank in violation of the boundaries established by the 1967 Six-Day War.

In early 2008, the Israeli government continued the construction of housing units for Jewish settlements in the West Bank and East Jerusalem, lands occupied during 1967.

Despite Palestinian opposition and international criticism, the government announced a decision to construct an additional 920 housing units in Har Homa, south of Jerusalem, and 884 housing units in Pisgat Zeev, north of Jerusalem.

In June 2008, the Ministry of Construction and Housing (MOCH) approved the construction of 763 housing units in Pisgat Zeev and 121 units in Har Homa following the approval to build 286 new housing units in Beitar Illit, near Jerusalem. In March 2008, a 750-unit project in the West Bank settlement of Givat Ze’ev was permitted.

These settlements undermine the peace process because of the strong Israeli security presence that they entail, and the intense sense of injustice that they provoke among Palestinians.

Foreign exchange rates

Short-term house price changes in Israel are directly correlated with changes in the exchange rate between the US dollar and the New Israeli shekel, according to a MOCH study. A sizeable proportion of real property transactions, house prices, and rents, are specified in US dollars because of the presence of expatriates, foreign buyers and local buyers with assets and salaries denominated in, or indexed to, the US dollar.

The substantial local currency appreciation in 2003 contributed to the 10.9% decrease of house prices that year, according to a report by the Bank of Israel. In 2006, the strengthening of the shekel against the US dollar in the second quarter also contributed to a drop in house prices.

Because of the continued weakness of the US dollar, some real estate transactions have shifted to the shekel, a move encouraged by the Bank of Israel to minimize fluctuations in the real estate market brought about by foreign exchange movements.

However, exchange rate fluctuations continue to impact consumer prices. In the first half of 2008, the appreciation of the shekel especially against the US dollar and euro caused inflation to decline sharply and consumer prices to fall.

Mortgage options

The most common type of mortgage in Israel is a floating rate, NIS-denominated loan. The Loan to Value Ratio (LVR) is typically 70-95% of the appraised value of the property. For foreign residents, 80-85% is usually the maximum loan amount. Mortgage brokers usually charge 1.5% of the amount of the loan plus VAT for their services.

For a basic comparison of the mortgage types available in Israel, see the table below.

Interest rates and the mortgage market

Though mortgage interest rates have generally declined since 2003, the amount of mortgage loans has barely risen, because of the political and economic uncertainty.

The average mortgage rate was 3.5% in June 2008, down from 6.7% in January 2003. However, the size of the mortgage market has fallen from around 30.3% of GDP in 2002, to 25% of GDP in 2007. After sluggish growth from 2002 to 2005, mortgage loans to households slightly declined to ILS 161 (US$46) billion in 2006 before rising 3% to ILS 166 (US$47.42) billion in 2007.

In April 2008, the Bank of Israel reduced the key interest rate to a record low of 3.25% to moderate the effect of the global crisis on the country’s economic growth. The central bank feared that a significant appreciation of the shekel against the major currencies would have an unfavorable effect on exports. However inflation then forced the central bank to push rates up in 3 steps to 4% in August 2008. The target for inflation is between 1% and 3%.