As demand for homes in Israel plummets, prices continue to soar

The past week has left residential real estate experts confused. While there has been a dramatic decline in demand for homes, home prices continue to rise rapidly. At the same time, there was a decline in the supply of homes for rent, and their prices are also rising significantly.

The past week has been packed with statistical data and publications. The Central Bureau of Statistics (CBS), the Ministry of Finance, and the Bank of Israel published extensive reports packed with data from which two clear conclusions emerged—the demand for homes is declining dramatically, while home prices continue to increase rapidly. Despite a 24 percent drop in the number of home purchase transactions in June, the housing price index published this week was particularly grim demonstrating another sharp increase in prices, by 2 percent, during May and June, which brought the annual rate of increase to 17.8 percent—the highest in the past decade.

If you are scratching your head in astonishment, you are not alone. Presumably, just like you, Israel’s economic leadership does not know how to relate to these figures. In the past six months, the government has taken a number of steps with the aim of suppressing the level of demand for homes, mainly among buyers of investment homes. These include the increase in the purchase tax on investors, raising the minimum tax bracket from 5% to 8%, and returning the giant lotteries for the purchase of subsidized apartments that were supposed to captivate the buyers of the first apartment and delay them from purchasing an apartment in the private market. At the same time, the Bank of Israel began to rapidly increase the interest rate, bringing it from 0.1 percent to 1.25 percent within 3 months (a further increase is expected by the Bank to announce this coming Tuesday).

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Supposedly, the state’s efforts can be crowned with success. The number of transactions to purchase an apartment has dropped dramatically and data show that it has succeeded. In June, home investors purchased only 1,600 apartments, 43 percent less than in June of last year. Overall, the total number of transactions in the market declined to ten thousand five hundred, which is a quarter of those in June of last year. And to complete the picture—mortgage data for July published by the Bank of Israel also show that during July, the public borrowed 10.1 billion shekels in mortgages —the lowest figure in the past six months.

However, in this case, as the well-known joke goes, the operation succeeded but the patient died. The decline in demand in itself was not an objective, but rather a means by which the state hoped to cool the boiling housing market and halt the price increases, which has not happened, so far.

There is currently no definite answer to the question of what is still going on here, only speculation. One of the explanations offered in the economic press was that the fact that every month the CBS reports a further increase in home prices (which in fact reflects an increase that occurred two months before the date of publication), puts the homebuyers under pressure and encourages them to make the purchase quickly, even at an inflated price, before it increases even further. And so, all the rumbling on price increases actually leads to the next price increase.

Another area that has been the focus of public attention in recent months is the area of rentals. In this sector too, prices are rising rapidly, with the CBS increasing rents in apartments by an average of 7 percent for new tenants, and by an average of 4 percent where the contract was renewed for existing tenants.

The increase in rental prices is easier to explain and is of course related to the state’s efforts to get buyers out of the market for investment. Since institutionalized long-term rentals are almost non-existent, the entire rental market relies on the same private investors, and a sharp decline in purchases by investors also means a decline in the supply of apartments for investment. Since some of the holders of investment apartments also sell their apartments, this leads to an actual reduction in the number of apartments offered for rent.

Thus, during the June period alone, the number of homes sold by investors was 750 more than the number of homes purchased by investors. In other words, the number of apartments offered for rent throughout Israel has shrunk by 750 apartments. Since November, when the purchase tax for investors became more expensive, about 5,000 rental apartments have been removed from the market in this way.

This is a classic case in which an attempt to solve one problem – the increase in home prices for purchase, creates another problem – an increase in the prices of apartments for rent. Unfortunately, in this case, even the attempt to solve the first problem is still far from successful.

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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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