Will the Israeli real estate market become an investor’s haven?
The COVID-19 crisis has left many of us confused about how to manage, and grow, our finances. The global stock market crash that took place in March 2020 led millions of investors to sell their assets. Some cautiously reinvested funds in stock markets and other financial instruments, but there are many who are still holding onto liquid capital as they wait for the crisis to wind down.
In parallel to the financial crisis that the world is currently experiencing, the Israeli residential real estate market is undergoing some significant shifts that could make it an attractive investment choice for many.
In order to understand this, we must take a look at the historical backdrop.
House prices have continuously risen since Israel was born
Housing prices in Israel have risen almost continuously throughout all of the years since the State was established, even during difficult times of war or when terrorist attacks took place in city centers. The most talented experts have endeavored to find an explanation for this unusual phenomenon, and a number of reasons have been put forward (to be discussed in a future article).
However, if we go back twelve years to 2008, a combination of increased demand for housing among Israelis, alongside the lack of satisfactory government planning, especially in Israel’s popular center, led to an unprecedented jump in housing prices in Israel.
For seven years thereafter, culminating in 2015, real estate housing prices in Israel rose more than 100%. Anybody who purchased an apartment in Israel for investment during these years was fortunate, for they benefitted from an approximate 10% year-on-year increase in value, in addition to the annual return of about 5% from rental income. To prove the point, during those seven years, Israel’s housing price index, which is supposed to reflect solid profit alongside low risk levels, beat most of the leading stock indices. The Dow Jones Industrial Average rose 58% between June 2008 and June 2015; the TA-125 Index rose during this period 40%; only NASDAQ rose at a slightly higher rate of 130%.
Government policy was aimed at lowering housing prices, encouraging first-time buyers
However, the sharp jump in prices also brought with it a social crisis: Young Israelis could not afford to purchase apartments for themselves. As a result, Finance Minister Moshe Kahlon, who took office in 2015, began implementing a series of aggressive policy measures that were aimed at lowering housing prices. In order to achieve this, Kahlon imposed heavy taxation on real estate investments and inaugurated a program in which tens of thousands of low-cost apartments for first-time owners were built on state land. These two steps succeeded in cooling down the market, but they weren’t successful in lowering real estate prices. They did manage to slow the rise of prices, and over the last five years, housing prices in Israel have “only” risen a total of 18%.
Current Government interested in reigniting investment in the Israeli real estate market, not focused on keep prices down
Then, in May 2020, a new Israeli government was sworn in and Moshe Kahlon was replaced by Israel Katz. The new government, which is currently busy contending with the COVID-19 pandemic, is no longer focused on trying to keep down housing prices or helping young couples to purchase a home. Billions of shekels from state coffers have already been spent on such programs. Rather they now are interested in stimulating investment in the economy. By alienating investors in recent years, the government has forfeited billions of shekels in taxes and the economy is no longer able to sustain that.
Thus, in accordance with the government’s policy, the new Housing Minister Yaakov Litzman announced that the low-cost housing program would be canceled and he has already requested that the Minister of Finance reduce, and in the peripheral areas even cancel, the heavy tax rate of 8% that had been placed on real estate investments.
Demand for housing expected to rise due to demographics
Most experts agree that while the supply of apartments in Israel is a parameter that can be controlled by the government, it is difficult – and some might even say impossible – to curb demand. This is due to the fact that Israel is considered a record-holder in population growth in Western countries. Population growth in Israel has fluctuated between 1.8%-2.0% over the years. By comparison, the average annual growth rate of OECD countries in the decade between 2008 and 2018 was 0.6%, and in the EU only 0.2%. In total, Israel’s population grew 21.5% in the span of ten years, whereas the average growth in OECD countries was only 6.3%.
Diaspora Jews also impact the demand for housing though immigration and foreign investment
Demand for Israeli real estate is affected not just by the number of Israeli residents looking to purchase apartments, but also by the number of Jews living outside of Israel in the Diaspora who are considering Aliyah and immigrating to Israel. In 2019, 35,000 people made Aliyah, which was higher than in previous years. Some people claim this increase can be attributed to the increase of anti-Semitism around the world.
Anti-Semitism driving Jews to move to Israel, or to purchase property in Israel
According to a study published by the Kantor Center for the Study of Contemporary European Jewry at Tel Aviv University, in 2019, the number of severely violent antisemitic incidents rose 18% compared with 2018 (456 cases in 2019, as opposed to 387 in 2018). Seven Jews and non-Jews were killed during violent antisemitic attacks, and the number of antisemitic incidents in most countries around the world rose, too. Researchers at the Kantor Center predict that the number of such incidents will probably be even higher in 2020, due to the economic and medical crises that have resulted from the COVID-19 epidemic.
Moreover, according to a 2019 study compiled by the Fundamental Rights Agency, 41% of the Jews between the ages of 16-34 living in Europe who were polled, considered making Aliyah due to a rise in antisemitism over the last five years.
If antisemitism throughout the world continues to rise, the number of Jews making Aliyah will most likely continue to rise, and in the meantime, many families who are considering Aliyah are purchasing apartments as an insurance policy, which will continue to push up the level of demand for housing in Israel.
No one can say with certainty what the Israeli housing market will look like in the future. Given the financial devastation and the unparalleled uncertainty that Corona has brought, it is possible that the market will fall in the short run. However, given the shifts in government policy, the population growth and anticipated rate of immigration, and the concerning increase in anti-Semitism around the world, it seems likely that demand for homes in Israel will only increase and that prices will continue to rise in the long-term future.
The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.
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