Residential Real Estate Market in Israel - History and Outlook

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.

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.

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.

 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.”

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