As interest rates continue to rise, Israeli homeowners are downgrading their homes

In Israeli real estate jargon, existing homeowners who sell and purchase a new apartment are referred to as “housing improvers.” However, data recently published by the Ministry of Finance revealed a trend that began when the Bank of Israel started raising interest rates, where an increasing portion of those improvers are actually buying cheaper homes. It was also found that more than 20% of those who sold an apartment in the center of the country purchased an apartment in the periphery instead. The rationale seems to lie in the difficulty of a growing number of households in coping with rapidly increasing mortgage repayments.

When it comes to official publications on real estate in Israel, it is customary to divide the homebuyer sector into three different groups: first-time home buyers – buyers who did not own a home prior to the purchase; investors – buyers who already own at least one home and after the purchase they own at least two; and a third group who own a home, purchase another home, and then sell the former, so that at the end of the process they still own only one home. This sector is referred to in the industry as home “improvers”.


Inherent in this term is the assumption that a household that makes a second or third home purchase will generally purchase a larger and more expensive home than their previous home. Overall, this is a reasonable assumption — unlike first-time homebuyers whose entire equity is based on savings, housing improvers, or upgraders, who already own a home that, after many years of price increases, has a significant amount of capital within its four walls, thus, their economic capabilities should be stronger. The motivation to change homes, which is usually associated with a growing family, therefore presents an opportunity to improve the living environment.

However, a survey of the residential real estate market recently published by the Chief Economist Department at the Ministry of Finance reveals a surprising picture, according to which the share of Israeli homeowners whose new apartment is cheaper than the one sold – known as “downgrading housing” – is actually increasing, fully in line with rising interest rates over the past 12 months.

“Although we tend to refer to this segment as ‘housing improvers,’ an analysis of the findings shows that since April of last year, when the Bank of Israel began raising the interest rate in the economy, the rate of home downgrading has actually increased, i.e., those who purchase a cheaper apartment than the one they sold,” the survey said. “Thus, while in March of last year, the rate of downgrading was 25% (out of all those home “improvers”), their share increased to a third of this segment in January-February.”

Another interesting statistic that emerged from the survey is that the gap between the sale price of the older apartment and the cheaper purchase price is also growing. “The average price gap between the apartment sold by “downgraders” and the apartment they purchased was about NIS 840,000 in February, and the median price gap was NIS 700,000. These amounts are significantly higher than they were in February of last year (when these price differences were NIS 625,000 and NIS 510,000, respectively). This means that in parallel to the increase in the rate of downsizing, the amount saved also expanded.

The economic challenge is increasing

How can this be explained? The hypothesis is that the reason for the increase in the rate of Israeli homeowners downsizing their homes is an increase in the number of retirees among them, that is, those who naturally wish to reduce their area of residence following the departure of adult children from their homes, was ruled out in the review. According to the data, there was no change between this past February and February 22 in the share of retirees among housing improvers. Both this year and last year, the share of retirement-age buyers and sellers was only 25% of all housing improvers. Thus, it appears that the phenomenon is related to the increase in the interest rate, and to the economic difficulties experienced by mortgage-paying households as a result.

The geographic distribution of housing downsizers supports this hypothesis —downgrading among those who lived in the center of the country increased at a higher rate than the rate of those in the periphery. The proportion of downgraders in the center of the country increased from 21 percent of all home improvers in March of last year (before the beginning of the interest rate increases) to 30 percent last February, an increase of nine percentage points. There was also an increase in peripheral areas, but more moderate, rising from 30% in March of last year to about 34% in February.

“It is reasonable to assume that the more accelerated increase in the rate of downsizing housing in the center is at least partly explained by the high price levels of apartments in the center of the country, which are pushing a wider population to purchase a cheaper apartment than they sold, against the background of interest rate increases,” the survey said.

It was also found that an increasing proportion of those Israeli homeowners who sold an apartment in the center of the country purchased a new apartment in the periphery. “In March last year, only 13% of those who sold an apartment in the center of the country purchased an apartment in the periphery. That rate went up to 21% last February.” However, it was emphasized that even among those who sold an apartment in the center and purchased an apartment in the center, there was a significant increase, of ten percentage points, in the rate of downsizing.

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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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