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The Counterintuitive Impact of War, Economic Crisis, and High Interest Rates on Home Demand in Israel
Sharp Rise in Home Prices in Israel
TL;DR:
The sharp rise in home prices in recent months, amid the significant challenges facing Israel today, is nearly a mystery. Reasons for this demand include substantial incentives in purchase conditions offered by developers, which price indices do not account for. The volume of new construction is also unexpectedly high, maintaining a robust supply despite a manpower crisis.
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In May and June, home prices in the Israeli market increased by almost one percent per month. According to the latest index from the Central Bureau of Statistics (CBS) in mid-June, the trend shifted from a 2 percent annual decline to a 2 percent annual increase in just five months. Over these five months, prices rose significantly, at nearly one percent per month, translating to a 10-12 percent annual increase. Higher prices reflect attractive payment terms.
Understanding the Price Increase
This sharp price increase requires explanation, given the already high price levels and a prime interest rate of 6%, especially with the country’s economic challenges due to the war. A logical explanation is the aggressive sales and marketing activities of developers after the recent slowdown. Many began offering unprecedented purchase terms on new homes, such as paying 20% at contract signing and 80% on delivery day, several years later, without interest and linkage. Sometimes, only 10% is required at signing. This benefit, worth hundreds of thousands of shekels, isn’t currently factored into home price indices, creating a distortion. On July 1, the Central Bureau of Statistics announced it would begin including this benefit in future CPI publications, effectively reflecting lower purchase prices. Demand for homes and mortgage volumes have surged as buyers return to the market.
Transaction Volumes and Market Activity
Transaction volumes have sharply increased recently. The year 2023 saw transaction levels tens of percent lower than normal, even before the war, due to rising interest rates and expectations of falling prices. Now, the interest rate has stabilized, expectations of price declines have been disproved, and buyers are returning to the market. The strong demand for homes, driven by Israel’s high natural growth rate, also plays a role, as does the anticipation of rising prices.
For example, in April (the latest month for data), there was an 80% jump in homes purchased (new and second-hand), totaling around 6,900. This robust market activity continued into May, with NIS 7.8 billion in mortgages taken, the highest since August 2022.
Regional Market Trends
The housing market in the central Dan region, especially Tel Aviv, is also heating up. Data shows a resurgence of demand in Tel Aviv, with over 600 new apartments and 475 second-hand apartments purchased from February to April, representing 60% and 41% increases, respectively, compared to the previous three months. Jerusalem saw even higher transaction numbers, with about 820 second-hand and 500 new apartments purchased in the same period.
Investors and Foreign Buyers
Investors are returning, but foreign residents aren’t mass-buying. Ministry of Finance data from June shows investors bought 1,175 homes in April, more than double last year’s amount, increasing their share of transactions to 16 percent. Non-resident purchases also rose, with 134 apartments bought in April, an 83 percent increase from the previous year, but still below expectations.
Supply Levels
Surprisingly, supply levels remain high. Despite nine months of war and a severe manpower shortage, serious supply problems haven’t developed. By the end of April, about 66,000 new apartments were available, slightly down from over 68,000 at the end of 2023, but still one of the highest levels ever.
Construction Activity in Jerusalem
Jerusalem, largely responsible for the high new construction levels, crossed the one million population mark last May. About 6,800 apartments began construction within 12 months (April 23-March 24), more than in Tel Aviv, where 5,300 apartments began construction in the same period. Jerusalem’s construction rate has quadrupled in recent years, and with numerous plans in the pipeline, the city is expected to continue growing.