Israel's decade-long house price boom is finally over
Lalaine C. Delmendo | October 03, 2019
This was far from an annual average price growth of 8.2% (6.9% in real terms) from 2009 to 2017. It follows y-o-y declines of 0.35% in Q1 2019 and 0.88% in Q4 2018 and annual rises of 2.94% in Q3 2018 and 5.59% in Q2 2018. The trend is clearly down.
On a quarterly basis, nationwide house prices increased 2.16% (1.22% in real terms) during the latest quarter.
The Southern district saw the biggest house price increase during the year to Q2 2019, with prices rising by 3.62%. Other districts that experienced modest to minimal year-on-year house price rises included the Northern district (2.91%), the Center (2%), Haifa (1.91%), and Tel Aviv (0.17%).
However, Jerusalem recorded a house price decline of 5.55% during the year to Q2 2019, partly offsetting the price increases seen in other districts.
The country's most expensive residential area is Tel Aviv, where the average price of owner-occupied dwellings was ILS 2,184,600 (US$620,273) in Q2 2019. It was followed by the Center at ILS 1,788,100 (US$507,695) and Jerusalem at ILS 1,783,500 (US$506,389). The North had the cheapest housing in Israel, with an average price of ILS 953,400 (US$270,699).
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 52,800 annually in 2015 to 2018 – 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, about 59,700 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.
The economy is projected to expand by 3.1% this year, lower than the annual growth rates of 3.3% in 2018, 3.5% in 2017, and 4% in 2016, based on the forecast released by the BOI.
The Bank of Israel kept its benchmark interest rate at 0.25% in August 2019, after a 15-basis point rate hike in November 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.
Economy growth slowing; very low unemploymentIn the second quarter of 2019, the Israeli economy grew by an annualized rate of just 1%, sharply down from expansions of 4.7% in Q1 2019 and 4.2% in Q4 2018, according to the CBS. The economy is projected to expand by 3.1% this year. But this is lower than the annual growth rates of 3.3% in 2018, 3.5% in 2017, and 4% in 2016, based on the forecast released by the BOI.
Unemployment stood at 3.8% in August 2019, down from 4% 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 3.4% in 2019, from 3.5% in 2018 and 4.3% in the previous year, according to the BOI.
Inflation is expected to be 1.6% this year, up from 1.1% in 2018, 0.2% in 2017, based on the forecast from the BOI.
In 2018, the country recorded a budget deficit equivalent to 1.9% of GDP – the second smallest deficit since 2008. But higher state expenses and lower tax collection have pushed the deficit close to 4% so far this year – far above the initial target of 2.9%. In fact during the first seven months of 2019, the deficit more than doubled to ILS 23.8 billion (US$6.83 billion) compared to a year earlier, according to the Ministry of Finance.
Israel’s public debt was equivalent to 61% of GDP in 2018, the second lowest shortfall ever recorded, according to the BOI. The country’s public debt has been generally falling since 2009.
Israel’s second election in fewer than six months has ended in political deadlock. With no clear winner in the recent general election held last September 17, 2019, both the incumbent prime minister, Benjamin Netanyahu, and his top contender, Benny Gantz, will now set about trying to form a governing coalition. But since both failed to secure a majority of 61 backers, President Reuven Rivlin vowed to do everything to form a national unity government, in an effort to avoid a third election this year.