From the global crisis in high-tech to rising interest rates and the judicial reform – a series of blows on the Israeli economy has led to a historic low in demand for apartments. All this is precisely when the market is flooded with supply. The industry already understands that home prices in 2023 will fall, the question is for how long will this continue?
The Israeli housing market emerged from the coronavirus crisis as fast as a bullet. From the end of 2020 to the middle of 2022, the number of transactions broke records and so did price increases, which last year reached an annual rate of increase of 20%. But every celebration must eventually end, and 2023 began with a sharp slowdown in the residential sector, reflected first and foremost in the worst slump in decades in the number of transactions in the market.
Thus, for example, according to Ministry of Finance data, the number of transactions for the purchase of an apartment last February under free market conditions (i.e., excluding transactions for the purchase of state-subsidized apartments) was about 5,800 – the lowest number of transactions in all months of February since 2003, which was during the second intifada.
An unusual combination of circumstances
Periods of highs and lows are an integral part of any economic industry. However, it seems that the current slowdown, which is unusual in its intensity, stems from the simultaneous timing of several events that dramatically affect the demand for apartments given the high price level in the market today.
The most important factor is, of course, the increase in interest rates. In order to combat surging inflation, the Bank of Israel has raised the interest rate nine times over the past year, from 0.1 percent on April 22 to 4.5 percent on April 23, and the hand is still tilting. The zero interest rate that prevailed in the market for more than a decade flooded the Israel real estate market with money and inflated home prices to some of the highest levels in the world. Now the increase in the price of money has led to a sharp decline in the public’s purchasing ability. Prices are expected to eventually respond, but in the meantime, there is a gap between the ability to purchase and price levels – hence the paucity of transactions.
A second decelerating factor is the current crisis in the high-tech industry. Almost every week we receive news of another tech giant launching a wave of layoffs. Although the crisis is on a global scale, few economies are as exposed to fluctuations in the industry as the Israeli economy. In 2021, 11% of employment in Israel was in high-tech – the highest rate in the West. The high-tech boom in Israel injected a huge amount of capital into the country, swaying the entire economy, including, of course, the real estate industry. With the outbreak of the crisis in the high-tech industry in the fourth quarter of 2022, the flow of investments has ceased. The consequences of this can be seen in an almost complete halt in residential real estate transactions in Tel Aviv, today one of the most expensive cities in the world, which in recent years attracted a huge number of high-tech professionals.
This brings us to the third factor in the slowdown of the housing market, which is the government’s attempts to change the system of government, a move that is perceived by some Israelis as an attempt to weaken the court in Israel. To those who do not support the advancement of the judicial reform by the current government, the measures that are being promoted are seen as a form of exacerbating the high-tech crisis and discouraging investment in Israel. To these parties, the judicial reform undermines their faith in the country’s future and its long-term prospects. Many in the liberal camp, whose share of economic activity is significantly greater than its share of the population, are pondering aloud about the option of emigration, although the point at which most of them will actually do so has not yet arrived.
Overall, this is not a situation that encourages property purchases among both local and foreign buyers. These three factors, operating together, are pushing the level of demand for apartments in Israel today to a historic low.
Construction capacity in the industry
Ironically, the drop in the level of demand for apartments comes at a time when the production capacity of the construction industry in Israel is at a peak, based on the huge volumes of demand in 2021 and the middle of 2022. In 2022, construction began on about 67,000 apartments – probably the highest figure ever. Thus, the abandonment of the market by buyers specifically during this period has left developers with shelves full of stock, for which demand is low.
According to the Central Bureau of Statistics, at the end of February 2023, the number of new homes currently offered for sale across the country stood at 54,500. By comparison, at the end of April 2022, this figure stood at 44,000. In other words, within ten months, the number of new homes offered for sale jumped by more than 10,000.
The forecast: falling prices
Although the housing market in Israel is known for its relative resilience, it seems that the current mix of circumstances is likely to overwhelm it. After several months in which the monthly home price index still showed minor price increases of 0.1 percent and 0.2 percent, for the first time in three years, the index published in April 2023 was negative, showing a decline in home prices by 0.2 percent.
These figures relate to the housing market as a whole. Specifically in the new housing market, where developers are dealing with huge increases in financing costs as a result of rising interest rates, prices have been declining by a cumulative 6 percent for four consecutive months.
It seems that this trend is not expected to change anytime soon and that 2023 will almost definitely be a year of falling prices in the Israel housing market. The question of how sharp the decline will be, and whether it will spill over into 2024, depends on the extent to which the distressed economy will recover and how long this will take.
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