Housing prices finally dip, but market pressures mean a surge will likely follow

New data from the housing sector is finally backing up what the experts have been saying for some time: Israel’s overheated property market has started to cool down.

The latest Central Bureau of Statistics (CBS) figures reflect a fall in housing prices between January and February in Tel Aviv (-0.5%), in Jerusalem (-1.1%), in Haifa (-0.5%) and across the south (-1.5%).

These reduced prices are against a backdrop of a major slowdown in housing transactions, according to the Finance Ministry’s latest report on the real estate sector, released just this week. According to the report, 6,311 apartments changed hands in February 2023, down 41% on February 2022. Preliminary analysis of the first part of March suggests that reduced levels of activity have continued. There’s also been a drop in demand for new residential units and a sharp plunge for Tel Aviv as the top location, according to a separate CBS report on transactions for new dwellings, published Thursday.

Finance Minister Bezalel Smotrich has been quick to declare that these numbers show the government’s commitment to battling inflation on behalf of Israeli households. He promised that “the fight against the cost of living through a free and competitive economy” can be won over the coming months and years.

But, in fact, housing prices have merely stabilized in recent months, having risen by 12% from last February — more than twice the level of general inflation, and three times the average rise in salary since last year.

Interest rate increases by the Bank of Israel over the past 12 months have aimed to tame inflation by increasing borrowing costs. So far, alongside falling prices and decreased levels of real estate activity, mortgage loan borrowing hit a four-year low in February 2023. Home owners borrowed about NIS 5.7 billion ($1.57 billion) for the month, down almost 50% from February 2022.

New and old apartments side by side in the Ir Ganim neighborhood in Jerusalem. (Lior Mizrahi/Flash90)

The result of rising interest rates (to 4.5%), combined with limited decreases in the cost of homes, has seen a dramatic reduction in the affordability of homes.

According to an analysis by mortgage broker Norman Shapiro, for typical borrowers with a NIS 1.5 million ($410,000) mortgage (the average property outside Tel Aviv costs around NIS 2 million or $550,000), monthly costs have risen by 27% to NIS 8,052 ($2,210) a month, up from NIS 6,324 ($1,735) last year. Shapiro says that “whereas at the end of 2021, a homebuyer with a monthly mortgage budget of NIS 6,324 could afford a home worth up to NIS 2,000,000, in March 2023, that same homebuyer could only afford a home worth up to NIS 1,570,000 — a NIS 430,000 drop in purchasing power.”

The increasing costs of borrowing are also impacting housing contractors, who typically finance developments through loans. The Finance Ministry reports higher falls in prices for new apartments compared to second-hand apartments, as contractors seek to sell off projects at a discount to maintain revenue flow. But sales volumes of new homes are falling sharply — down 34% in real terms since last year, and at the lowest level since May 2020 when the COVID-19 pandemic outbreak overshadowed the market.

Both Smotrich and Housing Minister Yitzhak Goldknopf have said that increasing the number of new homes being built annually was of utmost importance. Despite various local and national initiatives to secure more housing starts, it takes a long time for building projects to work their way through the system. And it takes considerable time to increase the number of building starts, let alone to translate them into homes people can live in. Last year, 80,511 building permits were approved in Israel, according to national figures documented on Trading Economics. It is a number that doesn’t keep pace with Israel’s growing population.

A construction site in Israel, May 2022. (Roman Mykhalchuk via iStock by Getty Images)

Israel’s Builders Association (ACB) told The Times of Israel that government intervention is urgently needed. Shay Pauzner, deputy director general of the ACB, said “construction starts recorded at about 70,000 between October 2021 and September 2022, may fall to about 50,000 by the next period.”

“When inflation slows down and buyers return to the market, a high demand with a tremendous shortage of apartments will raise prices again. The government needs to create incentives for contractors to keep building,” he said.

Investment advisor Ori Koskas said that with high borrowing rates and low rental yields (despite rent increases), “a pressure pipe is starting to form here that will eventually burst.”

“Young couples, investors, and even new immigrants are just sitting on the fence and waiting to see what will happen,” he said. His view is that while interest rate rises are acting to slow down the market, “as soon as they realize that the interest rate is going down or that’s just the way it is, potential buyers won’t wait and start to buy, and this will cause an extreme increase in apartment prices.”

Meanwhile, homeowners are waiting to sell their homes wherever possible, to see out what they believe is a temporary dip, and achieve high-range prices. Potential buyers, including property investors, are also waiting to see if more meaningful falls in value will allow them to stretch a little further.

Layoffs in the technology sector this year and general rising costs on consumer goods have affected purchasing power for many households, and confidence in many more.

But the simplest explanation for the lower levels of home sales would be that prices have simply risen to levels far beyond what the average person can reasonably risk.

House prices would have to fall much further to offer a meaningful improvement in affordability for the average Israeli household. Such a dramatic reduction would create a set of different difficult issues for the economy. With inflation generally leveling out, further interest rate rises are likely to be limited.

The most likely future scenario is that for a time at least, record price rises may cease, but the balance of supply and demand will ensure that real estate remains Israel’s most investable commodity.