Tenants see a sharp increase in rental prices over the past year

A drop in the number of home purchase transactions is leaving thousands of households in the rental market, precisely at a time when real estate investors who rent out their apartments are avoiding the market. The result is a sharp increase in rental prices, especially where there is a turnover of tenants. Meanwhile, the long-term rental market, which the government has been trying to develop over the past decade as a long-term solution, has also been hurt by the ongoing hikes in interest rates.

In recent months, the housing market has experienced a substantial slowdown, which led to a drop of tens of percent in the number of transactions, and as a result, for the first time in three years, also to the beginning of a decline in the prices of homes. And, while the market for homes for sale is cooling, the rental housing market is doing the exact opposite – sharp price increases, especially in apartments where tenants move out.


Thus, for example, according to the Central Bureau of Statistics, rental prices increased by half a percent last month across the entire market, for tenants who renewed an existing lease there was an annual increase of around 4.%, and for tenants starting a new lease, there was an increase of approximately 7.2% since last year. Overall, rental prices have increased by about 6% since March 2022. This price increase is due to a surge in demand on the one hand, and a decrease in supply on the other.

The surge in demand is logical—the increases in the interest rate of the past year by the Bank of Israel have led to a strong decline in the volume of home purchases for residential purposes, mainly by first-home buyers whose economic ability is limited. In other words, thousands of households that a year ago would have purchased an apartment now prefer to wait and continue to live in rentals.

Urban renewal projects send residents to rentals

Another factor contributing to the increase in demand is the emergent field of urban renewal, within the framework of Pinui-Binui and TAMA 38 projects in the demolition and construction track. As part of projects of this type, old buildings are demolished, and their residents are sent to live in rentals for a number of years, usually funded by the project developer, until completion of their new apartment 4-5 years later. The increase in the volume of construction in this area also means that several thousand households become tenants each year.

Reduction of holdings in investment apartments

In parallel, there has also been a decline in the supply of rentals, for reason that purchasing an apartment for investment, which is intended to be offered for rent, has become a much less lucrative move in recent years, even before the interest rate increases. Since the government raised the purchase tax for buyers of investment homes at the end of 2021, from a minimum tax bracket of 5 percent to a minimum tax bracket of 8 percent, there has been a significant drop in the volume of purchases.

In fact, since December 2021, there has been a decline in the total number of homes owned by the private investor sector. In other words, with each passing month, the total number of apartments sold by real estate investors exceeds the number of apartments purchased by them. According to data from the Ministry of Finance, since then, the total number of apartments held for investment by private apartment owners has declined by more than 7,000 housing units.

The long-term rental market weakened

The reduction in the pool of rental apartments held by the general public was supposed to be balanced by the development of a new sector in the Israeli real estate market – the establishment of rental complexes and long-term rentals. About a decade ago, shortly after the social protests of 2011, for which the rental shortage was one of the causes, the state established “Apartment for Rent” – a government company dedicated to promoting the industry, and even publishes land tenders for this purpose.  Alongside it, a number of real estate investment trusts (REITs) dealing in these were established, sometimes controlled by veteran real estate companies, such as Megoreit and Azorim Living.

The expectation was that the sector would attract “institutional money,” that is, investments by entities seeking solid investment channels, such as pension and insurance companies. The vision began to be partially realized, and over the past few years, there has been a gradual increase in the scope of activity in the field, which peaked in 2021-2022, when about 3,000 apartments began to be built as part of these long-term rental projects.

But the interest rate increases of the past year also threaten the long-term rental market, as it undermines its economic model. Even beforehand, the field was considered to provide a low yield of about 3% to investors, and the significance of raising the prime interest rate to 6% means that the cash flow in such projects becomes negative. Also the “cherry” that made these projects more attractive in the past,  namely, the expectation that the value of the apartments will increase in such a way that it will be possible to sell them at a profit in the future (according to the model of an apartment for rent, the project can be sold after 20 years) already seems less certain under the current circumstances.

Memories from 2011

It can therefore be seen that in the current situation, the rental market is still very challenging – especially for those who are now looking to find a new apartment to rent, at a high price level. At the moment, this is still a headache for renters only, but this may turn into a problem that the government will also have to deal with in the near future. Renters are generally economically weaker, and a situation in which rental prices make it difficult for renters to put a roof over their heads could potentially lead to a fierce protest, no less intense than those protests of 2011 – and at this point, this is the last thing the government needs.

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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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