Israel's house price growth is accelerating again, amidst recovering property demand.

Table of Contents

• Housing Market Snapshot
• Demand Highlights
• Supply Highlights
• Historic Perspective
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

After a plunge last year, new dwelling sales transactions surged by 58.6% y-o-y to 18,402 units in the first five months of 2024, while existing dwelling sales increased by 15.1% to 20,126 units over the same period, according to figures from the Central Bureau of Statistics (CBS).

As a result, the average price of owner-occupied dwellings in Israel climbed by 12.75% to ILS 2,233,400 (US$600,918) in Q1 2024 from a year earlier, its fifteenth consecutive quarter of y-o-y increase. When adjusted for inflation, prices actually increased by 9.86% over the same period.

Quarter-on-quarter, nationwide dwelling prices were up by 3.07% in Q1 2024 (2.77% inflation-adjusted).

The strong performance of the housing market is surprising given the economic fallout of the months-long war with the Hamas terror group. According to local real estate market experts, homebuyers are returning to the market despite security-related concerns, fearing that house prices will continue to increase in the coming months.

"We see buyers coming back to the market because they cannot wait any longer," said real estate developer Amit Gotlib. "How much can people wait to buy? Rents have gone up, people need to move out from their parent's homes, others get married, and babies are born. Many army reservists have come back from war and have returned to the market as well. They all see that rates are not going down and are worried that prices will actually rise even further because there will be a shortage of new homes as the construction sector has no workers."

This is supported by Netanel Shuchner, a lecturer in economics and real estate valuations at the College of Management Academic Studies: "We see the market waking up, both in terms of more deals and more demand, and we expect this trend to continue also in the coming quarter."

Israel's house price annual change

Among Israel's major cities, Ashkelon saw the biggest house price growth during the year to Q1 2024, with prices rising by a huge 29.21%. It was followed by Bnei Brak (19.31%), Rishon Lezion (17.35%), Holon (14.07%), Beit Shemesh (11.85%), Hadera (10.42%), and Ashdod (10.01%). Strong house price increases were also seen in Petah Tiqwa (9.75%), Beer Sheva (8.07%), Netanya (7.19%), Herzliya (7%), and Jerusalem (5.77%).

Minimal house price growth was recorded in Kfar Saba (1.87%), Haifa (1.79%), and Rehovot (0.95%).

In contrast, house prices declined in Ramat Gan (-5.49%), Tel Aviv (-1.16%), and Bat Yam (-0.09%).

The country's most expensive residential area is Tel Aviv, where the average price of owner-occupied dwellings was ILS 4,141,600 (US$1,114,338) in Q1 2024. It was followed by Herzlliya with house prices at an average of ILS 3,774,300 (US$1,015,513), Ramat Gan at ILS 3,011,600 (US$810,301), and Kfar Saba at ILS 2,918,600 (US$785,278).

Beer Sheva had the cheapest housing in Israel, with an average price of ILS 1,234,200 (US$332,073).

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 58,600 annually from 2015 to 2023 - 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, about 65,000 households have won the lottery, but only around one-third 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. Yet the central bank reversed its monetary policy in January 2024 by cutting the key rate by 25% basis points and keeping it unchanged since.

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). From 2022 to 2023, house prices rose further by nearly 23% (13% inflation-adjusted).

Yet, the overall economy continues to suffer from the adverse impact of the ongoing war in the country. The Israeli economy expanded by a modest 2% during 2023, a sharp slowdown from robust growth of 6.5% in 2022 and 9.3% in 2021, amidst rising interest rates, heightened global economic uncertainty, and domestic conflict.

Then in Q1 2024, the country's real GDP contracted by 1.24% from the same period last year, following a y-o-y decline of 4% in Q4 2023 and annual growth of 3.4% in Q3, 3.5% in Q2, and 4.2% in Q1.

As such, the Bank of Israel (BOI), the country's central bank, expects economic growth to slow further to just 1.5% in 2024. It is in line with the IMF's forecast of a 1.6% growth for Israel this year.

Demand Highlights

Residential property sales improving again

During 2023, the total number of dwelling transactions in Israel plunged by 34.2% to 67,168 units from a year earlier, according to CBS.

By market:

• Existing dwellings sold were down by a huge 36.7% y-o-y to 39,251 units in 2023.
• New dwellings sold dropped 30.3% y-o-y to 27,917 units last year.

However, demand seems to be recovering this year. In the first five months of 2024, new dwellings sales surged by 58.6% y-o-y to 18,402 units while existing dwellings sales increased by 15.1% to 20,126 units.

By region:

• In Tel Aviv, new housing transactions were up by 71.5% y-o-y to 3,270 units in the first five months of 2024. Likewise, existing housing sales also increased by 21.7% to 2,741 units over the same period.
• In the Centre, new housing transactions soared by 134% y-o-y to 5,257 units in Jan-May 2024 while existing housing sales were up by 41.9% to 4,803 units.
• In Haifa, new home sales rose by 65% y-o-y to 2,289 units in the first five months of 2024 while existing home sales increased 9.7% to 3,739 units over the same period.
• In the Northern District, new home sales were up strongly by 79% y-o-y to 1,981 units while existing home sales declined 16.3% y-o-y to 2,262 units.
• In Jerusalem, new home sales fell by 4.5% y-o-y to 1,420 units while existing home transactions increased by 23.1% to 1,829 units.
• In the Southern District, new and existing home transactions rose by 28.2% y-o-y to 3,976 units, and by 10.8% to 4,065 units, respectively.
• In Judea and Samaria, new home sales declined by 4.6% y-o-y to 197 units while existing home sales increased by 14.6% to 667 units.

As of May 2024, there were a total of 67,472 new dwellings available for sale in the market, up by 18.6% from a year earlier. At the current sales rate, this implies that the stock of new dwellings is equivalent to about 17.5 month's supply.

Supply Highlights

Residential construction activity showed mixed signals

During 2023, the total number of dwelling starts in Israel fell by 8.9% y-o-y to 62,033 units, in contrast to annual increases of 6.2% in 2022 and 13.9% in 2021, based on figures from CBS. Despite this, it remains the third 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 9.4% y-o-y to 12,460 units in 2023, following a decline of 10.3% in 2022 and an increase of 33% in 2021.
• In the Central district, dwelling starts dropped 9.6% y-o-y to 15,054 units last year, after increasing by 18.2% in 2022 and declining by 7.7% in 2021.
• In Haifa, dwelling starts were up by 4.7% y-o-y to 5,540 units in 2023, following a drop of 23.6% in the prior year and an increase of 46.7% two years ago.
• In the Northern District, dwelling starts rose by 5.9% y-o-y to 9,498 units in 2023, after a surge of 23.9% in 2022 and a slight increase of 1.6% in 2021.
• In Jerusalem, the number of dwellings started dropped 7.5% y-o-y to 7,685 units in 2023, in contrast to annual growth of 28.1% in 2022 and 25.8% in 2021.
• In the Southern District, dwelling starts plummeted by 20.2% y-o-y to 10,036 units last year, after an increase of 7.6% in 2022 and a slight decline of 0.1% in 2021.
• In the Judea and Samaria area, dwelling starts plunged by 31.2% y-o-y to 1,758 units in 2023 from a year earlier, following a contraction of 11.7% in 2022 and a surge of 118.6% in 2021.

On the other hand, dwelling completions nationwide increased by 9.3% to 57,894 units in 2023 as compared to a year ago, following a y-o-y growth of 12.4% in 2022 and annual declines of 6.2% in 2021 and 5.7% in 2020.

Haifa saw the biggest increase in dwelling completions of 31.1% y-o-y in 2023, followed by Judea and Samaria (24.3%), Tel Aviv (23.1%), Central district (13.1%), and Northern district (5.8%). In contrast, Jerusalem and Southern district registered declines of 23% and 1.3%, respectively.

Residential construction activity continued to show mixed results in early 2024. Dwelling starts rose by 2.7% y-o-y to 15,955 units in Q1 2024 while completions dropped 5.9% to 11,898 units, based on CBS figures.

There were 173,711 dwellings under construction in Q1 2024, up slightly by 2.8% from the same period last year.

Rental Market

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 in the country averaged 2.53% in Q2 2024, down from 2.92% in Q3 2023, according to recent research conducted by the Global Property Guide.

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

By city:

• In Tel Aviv, the gross rental yields ranged from 1.88% to 3.29% in Q2 20204, with a city average of 2.38%.
• In Jerusalem, apartments generally offer rental yields between 2.37% and 3.65%, with a city average of 2.52%.
• In Haifa, rental yields ranged from 1.57% to 3.77%, with a city average of 2.39%.
• In Be'er Sheva, one can earn gross rental yields ranging from 2% to 3.39%, with a city average of 2.69%.
• In Ra'anana, rental apartments give yields of between 2.07% and 2.3%, with a city average of 2.18% in Q2 2024.

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$2,500 to US$2,700 per month in Q2 2024. On the other hand, renting in Jerusalem for a similar property is likely to cost you US$1,700 to US$2,100 per month.

Mortgage Market

Mortgage market growth slowing

Israel's mortgage market has actually expanded to more than 31% of GDP in recent years, 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. In fact, in 2023, the mortgage loan-to-GDP ratio fell slightly to 31.2%, from 31.6% in the prior year.

Israel's mortgage loan interest rates:

As of April 2024, total housing loans outstanding increased by 5.29% y-o-y to ILS 596.22 billion (US$160.42 billion), following annual growth of 4.8% in 2023, 13.8% in 2022, 18% in 2021, 9.1% in 2020, and 11% in 2019.

In the first half of 2024, the total volume of new housing loans to households rose by 5.3% y-o-y to ILS 38.42 billion (US$10.34 billion), following a decline of 47% in H1 2023, and annual expansions of 33.4% in H1 2022 and 39.6% in H1 2021, based on figures from the BOI.

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

Despite high 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.

"Despite household's increased difficulties in repayment debt in view of the monetary tightening that continued since the beginning of the year and the real erosion of independent sources, the volume of household credit at risk remains low," said the BOI in its H2 2023 Financial Stability Report. "This is true even when considering the impact on the income of some households as a result of the war, which may increase their difficulty in servicing their debt."

The ratio of household debt to GDP remains low relative to other countries.

Moreover, while housing credit constitutes a significant portion of total household credit in Israel, it 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 last year.

Bank of Israel's key rate remained unchanged, housing loan rates remain high

In July 2024, the Bank of Israel (BOI) kept its key interest rate unchanged for four straight meetings at 4.5%, after cutting it by 25 basis points in January, amidst geopolitical tensions and the ongoing war.

"In view of the continuing war, the Monetary Committee's policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity. The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy," said the BOI in its July 2024 Monetary Policy decision.

Prior to this, the BOI raised its key interest rate by ten consecutive times with a cumulative rate hike of 465 basis points from April 2022 to May 2023, in an effort to rein in heightened inflationary pressures.

Despite the BOI's recent monetary policy shift, the key rate remains at its second-highest level since December 2006.

As such, interest rates for housing loans remain exceptionally high. In May 2024, the average interest rate of CPI-indexed housing loans (fixed, variable, and zero coupons) to households rose to 3.12%, down from 3.62% a year earlier but still up from 2.43% two years ago, according to figures published by the BOI.

Over the same period:

• Fixed-rate, indexed to CPI: 3.01%, down from 3.33% in the previous year but still up from 2.36% two years ago
• Fixed-rate, not indexed: 4.98%, slightly lower than the 5.04% a year earlier but still up from 3.91% two years ago
• Variable and fixed rate, indexed to foreign currency: 6.58%, up from 6.46% in May 2023 and 2.81% in May 2022

Historic Perspective

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.

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%. Then from Q1 2022 to Q4 2023, house price growth in Israel accelerated to 20.28%, despite a sharp decline in property demand.

Socio-Economic Contex

Sharp economic slowdown

The Israeli economy expanded by a modest 2% during 2023, a sharp slowdown from robust growth of 6.5% in 2022 and 9.3% in 2021, amidst rising interest rates, heightened global economic uncertainty, and domestic conflict.

In Q1 2024, the country's real GDP contracted by 1.24% from the same period last year, following a y-o-y decline of 4% in Q4 2023 and annual growth of 3.4% in Q3, 3.5% in Q2, and 4.2% in Q1.

The Bank of Israel (BOI) expects the country's economic growth to slow further to just 1.5% in 2024. It is in line with the IMF's forecast of a 1.6% growth for Israel this year.

"The State of Israel has been at war for approximately 9 months. Beyond the security effects, the war is having significant economic consequences," said the BOI. "Supply constraints are making it difficult for economic activity to converge to the trend that characterized the economy prior to the war, and the extent of continued geopolitical uncertainty is reflected in the economy's high-risk premium."

Israel posted an average economic growth of 4.2% annually from 2010 to 2019, before contracting by 1.5% in 2020 due to the Covid-19 pandemic.

The country registered a budget deficit equivalent to about 4.2% of GDP in 2023, in sharp contrast to the surplus of around 0.6% of GDP achieved in the prior year.

During the first four months of 2024, government spending increased by a whopping 35.8% y-o-y to ILS 195.3 billion (US$53 billion), mainly due to a surge in military expenditures on the ongoing Israeli-Palestinian conflict that started on October 7, 2023. In contrast, government revenues fell by 2.2% y-o-y to ILS 157.6 billion (US$42.75 billion) over the same period.

As such, the government expects the deficit to widen to around 6.6% of GDP this year. The debt-to-GDP ratio is also projected to increase to 67.5% in 2024 and 68.5% in 2025.

Consumer price increases are moderating. In June 2024, the annual inflation rate stood at 2.9%, slightly up from 2.8% in the previous month but sharply down from 4.2% in the previous year, according to figures from the CBS. It remains within the upper band of the central bank's inflation target range of 1% to 3%.

From an annual average of just 0.5% from 2012 to 2021, inflation soared to 4.4% in 2022 and to 4.2% in 2023.

The labor market remains robust. In June 2024, the nationwide unemployment rate was 3.2%, down from 3.4% in the previous month and 3.6% in the same period last year, according to CBS Labour Force Survey Data for June 2024.

"In the labor market, the broad unemployment rate increased sharply in October, with the eruption of the war, after which it declined at a relatively rapid pace, and stabilized in the second quarter," said the central bank.

Sources:

1. Price Changes in the Dwellings Market: June 2024 (Central Bureau of Statistics): https://www.cbs.gov.il/
2. Average Housing Indices and Prices - June 2024 (Central Bureau of Statistics): https://www.cbs.gov.il/
3. Real Estate Transactions - Dwellings in March-May 2024 (Central Bureau of Statistics): https://www.cbs.gov.il/
4. Despite concerns, buyers return to Israel housing market, fearing further price rises (Times of Israel): https://www.timesofisrael.com/
5. Construction Begun and Completed in 2023 (Central Bureau of Statistics): https://www.cbs.gov.il/
6. Construction Begun and Completed in April 2023-March 2024 (Central Bureau of Statistics): https://www.cbs.gov.il/
7. More than 100,000 sign up for discount apartment lottery, less than 5% will win (The Jerusalem Post): https://www.jpost.com/
8. Credit (Bank of Israel): https://www.boi.org.il/
9. BOI interest rate and the monetary tools (Bank of Israel): https://www.boi.org.il/
10. Israel interest rate (Trading Economics): https://tradingeconomics.com/
11. Israel Homeownership Rate (Trading Economics): https://tradingeconomics.com/
12. Gross rental yields in Israel: Tel Aviv and 4 other cities (Global Property Guide): https://www.globalpropertyguide.com/
13. Israel (International Monetary Fund): https://www.imf.org/
14. Israel GDP Annual Growth Rate (Trading Economics): https://tradingeconomics.com/
15. Monetary Policy Report First Half of 2024 (Bank of Israel): https://www.boi.org.il/
16. The Monetary Committee decides on July 8, 2024 to leave the interest rate unchanged at 4.5 percent (Bank of Israel): https://www.boi.org.il/
17. Israel's 12-month budget deficit surges to 35.4 bln USD (Xinhua): https://english.news.cn/
18. June 2024 consumer price index (Central Bureau of Statistics): https://www.cbs.gov.il/
19. Israel CPI keeps ticking higher, edges up to 2.9% annual rate in June (Reuters): https://www.reuters.com/
20. Bank of Israel holds rates, to remain cautious while war persists (Reuters): https://www.reuters.com/.
21. Labour Force Survey Data, June 2024 (Central Bureau of Statistics): https://www.cbs.gov.il/
22. Financial Stability Report for the second half of 2023 (Bank of Israel): https://www.boi.org.il/