In retrospect: The effect of the global economic crisis on real estate in Israel

Posted on 25. Jul, 2010 by Buy-It In Israel Staff in Israel Real Estate

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The global economic crisis had a moderate impact on activity in the Israel real estate, building and construction sector, despite earlier concerns and difficulties by contractors and home-buyers to receive credit, according to a July report by Israel’s Housing and Construction Ministry. The report noted though that credit difficulties to a lesser extent still pertain.

In retrospect, the slowdown in activity in the sector was most prominent in the last quarter of 2008 and the first months of 2009. In the second part of 2009 and the beginning of 2010, the construction and building sector has seen a gradual recovery in activity. The number of new and second-home purchases rose gradually by 9 percent during 2009 compared with a year earlier, and was higher than in 2007 and previous years. This trend continued in 2010 as the volume of housing deals increased by 16 percent in the months January to April.

The recovery trend in the housing sector is expected to continue as the majority of economic indicators improve pointing to renewed growth in the economy led by stronger domestic demand and a decline in unemployment. At the same time though, the pace of recovery in Israel’s economy, which has a direct impact on the real estate market, will depend on the recovery in the global economy.

“The majority of economic indicators show that the Israeli economy is entering a growth path which can also be seen in the real estate sector,” said Rachel Hollander, head of information and economic analysis at the Housing and Construction Ministry. “However, as a result of the sharp increase in property prices, potential homebuyers are facing difficulties in raising enough own capital needed to buy a home and make mortgage payments. In addition to an increase in the marketing of land to the sector to stem the price hike, more assistance is needed to ease the credit problem for areas in the periphery and for weak populations to help them during the process of buying a home in Israel.”

Demand for apartments in the housing market in Israel has continued to rise in the past months as a result of the country’s relative sound state of the economy removing much of the uncertainty following the global crisis, and a low interest rate environment. While at the same time, property prices continued to go up during and after the global economic crisis, which has kept many potential home-buyers and sellers sitting on the fence. In parallel, there was also an increase in construction starts for residential housing, which was however not enough to satisfy high demand.

In 2009, the volume of construction starts rose by 6 percent to 34,300 units compared with a level of 30,000 to 32,000 units in previous years. According to estimates by the Housing Ministry, annual demand for housing in the past few years stands at an average of 50,000 units, which consists of 40,000 units on average for households, in addition to 10,000 units, which are bought by investors mainly from abroad for rent purposes or for holiday homes.

Hence for a number of years, the supply of apartments is not meeting the needs in the market. As a result of this discrepancy, property prices have continued to rise from the beginning of 2009, strengthening further in 2009 and continuing the trend in 2010. From 2008 until April 2010, apartment prices have increased by 38 percent in nominal terms (26 percent in real terms) compared with average prices in 2007. While in the years, 1998 to 2007, property prices in real terms fell year-on-year. At the same time, rental prices last year grew by 16.6 percent and at a rate of 4.7 percent in the first quarter of 2010.

The Housing Ministry emphasized though that the latest data point to a continued increase in construction starts during 2010 and in coming years. In order to deal with the shortage of supply of residential property in Israel, the Housing Ministry and the Israel Land Administration have marketed tenders for a total of 24,600 Israel real estate housing units between September 2009 and June 2010.

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