December 2024 marked a record-breaking period for mortgages in Israel, with total loans reaching an unprecedented NIS 13.8 billion. This surge was driven by five key buyer demographics, including those purchasing apartments priced between NIS 2-3 million. These buyers often took out substantial loans, with nearly half securing mortgages exceeding NIS 1.2 million.

Another trend was the rise in “balloon” loans – mortgages with deferred repayment terms—which totalled NIS 3.2 billion in December alone, doubling the previous record. Real estate investors also played a significant role, with their activity levels reaching the highest since mid-2022.

However, one of the most intriguing developments was the surge in foreign buyers. This group, while still a relatively small portion of the overall market, has seen its activity increase dramatically, especially in Jerusalem’s luxury sector.

Historically, foreign buyers played a more significant role in Israel’s property market, with peak years in 2005-2006 seeing upwards of 400 transactions per month. However, factors such as the global financial crisis, rising property prices, and tax policy changes led to a steep decline. During the pandemic, foreign transactions dwindled to just dozens per month.

The tide has since turned. By 2024, foreign purchases had rebounded, with monthly transactions reaching approximately 150 apartments – a significant improvement compared to the lows of five years ago. Jerusalem has been the epicentre of this resurgence, with foreign buyers snapping up nearly 100 apartments per month in the city and its surroundings.

The demographics of these buyers reflect a shift toward ultra-Orthodox and religious communities. Many are purchasing homes as part of a long-term plan, driven by rising global antisemitism and the desire for a foothold in Israel. For example, projects like Israel Canada’s “Midtown” in Jerusalem have attracted substantial interest from American Hasidic communities.

Foreign residents have become a dominant force in Jerusalem’s luxury real estate sector. In November and December alone, they purchased 22 apartments priced above NIS 10 million, making up a significant share of high-end transactions in 2024. Notably, these buyers often seek new developments, contributing to the surge in mortgage activity at the end of the year as they rushed to complete purchases ahead of a VAT increase.

A senior mortgage banker noted that most foreign buyers hail from the United States, England, and France. While Americans and Britons tend to acquire properties as a form of security without immediate plans to relocate, French buyers are more inclined to move to Israel. The Tishrei holidays in September traditionally see a spike in purchases, reflecting a pattern of increased activity tied to cultural and religious visits.

While foreign buyers still account for a modest share of Israel’s property market – estimated at 2% of transactions in 2024 – their influence is growing, particularly in Jerusalem. As global uncertainties persist, this trend is likely to continue, reinforcing Jerusalem’s status as a prime destination for foreign investment and underscoring the evolving dynamics of the Israeli real estate market.

Image credit: Freepick

<p>The post Foreign Buyers Drive Surge in Israel’s Property Market first appeared on Isranomics.</p>

A look at the supply side reveals a perplexing trend. By the end of July 2024, the Central Bureau of Statistics (CBS) reported that there were 69,430 unsold new housing units. This figure represents a 19% increase compared to July 2023, a 47% rise compared to the same month in 2022, and a staggering 53% jump from three years ago. Despite this unprecedented supply, prices continue to climb sharply.

This unusual situation suggests that the supply of apartments on paper does not align with the demand for specific types of housing. Many of the available units are not considered desirable by potential buyers. For instance, when purchasing new apartments, buyers often seek recently completed homes, while in the second-hand market, properties with added safety measures, such as protection from security threats, are in higher demand. As a result, many available units are either under construction or lack the necessary features, making them less appealing to buyers.

The housing supply crisis is exacerbated by long-standing government failures. Past administrations have not adequately addressed the need for urban renewal or implemented the necessary measures under initiatives like TAMA 38, aimed at improving building safety. Furthermore, the current government’s policies have led to a significant reduction in construction workers, further slowing down the pace of housing development. These challenges have contributed to the growing gap between housing supply and the demand for livable, desirable properties.

One notable trend is the increasing share of new apartments being sold. In the first seven months of 2024, new apartments accounted for 47% of all transactions. This shift is particularly evident in cities like Tel Aviv, where the number of new apartments sold tripled within seven months. Two-thirds of apartment buyers in Tel Aviv opted for new homes, while in Ramat Gan, over half of the buyers purchased new apartments. In southern cities like Ofakim and Sderot, where concerns over safety are more pronounced, the second-hand market is almost non-existent, with most buyers choosing newly constructed homes.

Apartment prices are not rising uniformly across Israel. Since November 2023, the Haifa district has seen the highest increase, with prices rising by 9.7%. Central Israel follows with a 7.8% rise, and Tel Aviv recorded a 7.2% increase. The northern district saw prices rise by 6.8%, the southern district by 4.4%, and Jerusalem by 2.9%.

Interestingly, the prices of new apartments rose by only about 3%, indicating that most of the price increases occurred in the second-hand apartment market, particularly for properties with added protection or other desirable features.

The rental market has also seen price increases, although at a more moderate pace. In August 2024, the rental price index increased by 0.7%, bringing the total increase since November 2023 to 3.5%. During the winter months, the rental market experienced a slowdown, with some areas even seeing slight decreases. However, rents picked up again during the summer months, reflecting the broader trend of rising housing costs.

Image credit: freepik.com

<p>The post Israel’s Housing Market: High Supply, Rising Prices, and Unresolved Challenges first appeared on Isranomics.</p>

According to Jackie Mukmel, former CEO of CBRE Israel, the excess supply may be even greater, estimating a surplus of 1.7 million square meters between Netanya and Holon, with about a quarter located in Tel Aviv’s towers. The challenge for tower owners lies not only in the decreased demand but also in the competition posed by newer, more modern towers.

The Israeli office real estate market faces unique challenges, including a lack of transparency, manipulations by entrepreneurs and property owners, and a general difficulty in obtaining accurate data. Unlike the residential sector, there is no centralized monitoring body, further complicating efforts to understand and analyze the market’s dynamics.

Geocartography’s recent study focused on offices in Tel Aviv and Ramat Gan, revealing that the shift to remote work, accelerated during the pandemic, gained momentum even during the subsequent war. New and prestigious towers now show over 15% of offices with excess space, some appearing abandoned or closed on certain days due to remote work.

Companies, bound by lease agreements, often don’t return surplus areas to property owners and instead seek subleases or expand existing workspaces to maintain an appearance of business as usual. This sublease trend contributes to the semi-underground nature of the market, making it challenging to gauge accurate rental prices.

Prices in the office market have dropped, with offerings in Azrieli Towers ranging from NIS 110-150 per square meter, a significant reduction from the peak two years ago. Mukmel estimates price reductions of up to 30%, particularly in towers established by purchasing groups and areas sold by sub-tenants.

Demand for office spaces, primarily from small businesses, remains concentrated in Tel Aviv, with almost half of the offices having up to ten employees. However, the supply has outpaced demand, with approximately 1.5 million square meters of offices built in the Tel Aviv district over the last five years.

Dr. Degani anticipates that the real challenge lies in the completion of approximately half a million square meters of office buildings in the next couple of years, exacerbating the current surplus. Even in a challenging market, the demand for at least 160,000 square meters is expected, leaving owners of around 340 thousand square meters struggling to find tenants.

The duration of the ongoing tower crisis remains uncertain, influenced by factors such as hybrid work trends, the political and geopolitical situation, and the global economy. As the market grapples with these complexities, the once-thriving office real estate landscape in Tel Aviv faces a period of significant adjustment.

<p>The post Office Space Oversupply Challenges Tel Aviv’s Real Estate Landscape first appeared on Isranomics.</p>

The issuance of building permits in the same quarter reached the third-highest level since at least 2018, with 20,287 permits granted. This data, coupled with the assurance from the Central Bureau of Statistics, indicates that the robust pace of construction is expected to continue well into 2024, despite a downturn in developer sales.

While the total construction permits for approximately 47,600 apartments in the first three quarters of 2023 show an 11% decrease compared to the same period in 2022, the overall construction permits of about 52,000 units represent a more modest 6% decline. These figures, though declines, are significantly less severe than the 40% or more drop in apartment sales recorded over the past year.

The construction boom is not without challenges, especially in the aftermath of the war with Hamas that led to the exclusion of Palestinian workers from construction sites in Israel. The industry is now compelled to find alternative labor sources from other countries to sustain the ongoing construction surge.

A paradox emerges when comparing the high construction starts with the free fall in apartment purchases. This discrepancy can be attributed to differing timelines — the construction starts reflect processes that span several years, from land acquisition and planning to obtaining approvals and building permits.

Some of the construction starts in the third quarter of 2023 may have originated from initiatives dating back 4-5 years, possibly initiated during the tenures of former Ministers of Finance Bezalel Smotrich and Yitzhak Goldknopf but brought to fruition during the terms of Moshe Kahlon as Minister of Treasury and Yifat Shasha-Biton as Minister of Housing.

Tel Aviv, despite experiencing a notable decrease in property transactions over the past two years, takes the lead in construction starts with 5,907 apartments initiated between October 2022 and September 2023, marking an 11% increase from the preceding period. Jerusalem follows with 4,012 starts, while Bat Yam and Ashkelon recorded 2,548 and 2,082 construction starts, respectively.

An intriguing aspect of the construction landscape is the focus on urban renewal, with approximately 53% of the 11,950 apartments initiated as a result of demolishing existing buildings and constructing new ones concentrated in the Tel Aviv district. The Central district accounted for about 28%, indicating a growing trend towards revitalizing established urban areas.

Notably, 76% of the apartments resulting from demolitions and reconstructions, amounting to 9,090 units, were carried out under TMA 38/2 and evacuation-construction initiatives, showcasing a concerted effort to enhance the resilience and sustainability of existing structures.

In conclusion, while the decline in apartment sales poses challenges for developers, the robust construction activity signals a promising future for the Israeli real estate market. The record-breaking construction starts and building permits reflect a forward-looking industry that continues to adapt and thrive amidst changing economic and geopolitical landscapes.

<p>The post Israeli Real Estate Market Defies Market Trends, Despite Decline in Apartment Sales first appeared on Isranomics.</p>

The real estate market crisis has had a profound impact on the construction industry. A 40% decrease in transactions has led to a significant rise in unsold apartments held by contractors. When apartments are not being bought, developers naturally reduce construction starts. Unsurprisingly, in the first quarter of 2023, only around 15,000 construction starts were recorded, a setback that may continue throughout the year.

Tel Aviv remains relatively bright spot in the market. The largest Israeli city had the highest number of new apartments built in absolute terms in the last twelve months – 4,514 new apartments initiated between April 2022 and March 2023. Many of these were part of urban renewal projects, where developers have contractual obligations that make it challenging to halt the project. However, despite these efforts, the purchase of new apartments in Tel Aviv has declined by over 50% compared to the previous year, indicating a sustained downward trend.

Developers would stop construction if they could, but contractual obligations to apartment owners and buyers prevent them from doing so. This has resulted in a discrepancy between construction starts, which decreased by 10% in Tel Aviv, and the purchase of new apartments, which declined by more than half. This has led to a significant increase in the supply of unsold apartments in the city. Though the exact number is not available at present, according to some estimates the stock of unsold apartments has increased by approximately 2,000 units in the past year.

Jerusalem ranks second in construction starts, with 4,005 housing units initiated between April 2022 and March of this year. While purchases of new apartments in Jerusalem also declined, the decrease was around 11%. Notably, recent months have seen larger purchase numbers in Jerusalem compared to Tel Aviv, making the situation in Tel Aviv unique.

Other cities with significant construction activity include Rishon Lezion, Bat Yam, and Be’er Sheva. Approximately 13.2% of all construction starts are part of government-subsidised programs.

The bad news is that it probably won’t end there. Increasing interest and financing costs, along with falling flat purchases, are anticipated to cause further reductions in construction starts later this year.

Nonetheless, hope is not lost; the situation can be reversed. Israel’s government can take measures to help the country’s construction sector recover from a recent slump. Government action to revitalise the industry and avert the current crisis is possible through demand-stimulating policies, infrastructure investments, financial support and incentives for developers. These measures would not only boost apartment purchases and construction activity but also contribute to economic growth, job creation, and the overall improvement of the housing market.

However, it is worrying to observe that the government’s current focus lies on other priorities, such as the pursuit of judicial reform, which may not align with the immediate needs of the majority of ordinary Israelis. While the issue of reforming the long-standing Supreme Court is important, it may not be a pressing concern for the average citizen. Conversely, ensuring the smooth functioning of a key sector of the Israeli economy holds paramount significance. It is crucial for the government to shift its attention towards addressing the ongoing crisis in the construction industry. A balanced approach that tackles the immediate economic challenges is necessary to foster a comprehensive and sustainable recovery, benefiting both the construction sector and the overall well-being of the nation.

<p>The post Israel’s real estate market faces steep decline in new starts first appeared on Isranomics.</p>

Comparing the mortgage volumes in May to the monthly averages from the last quarter of 2022, a stark decline of 46% is observed, aligning it with the mortgage levels witnessed in the second half of 2020. This drop is indicative of a significant reduction in mortgage borrowing within just the past three years.

The situation, however, is far more severe when considering the surge in apartment prices since mid-2020, which have risen by approximately one-third. Consequently, it could be said that the equivalent amount of mortgages is being taken out amidst a considerably lower number of property transactions.

The dwindling number of transactions corroborates the Central Bank and Chief Economist’s reports, which indicate a decline of over 40% compared to the corresponding months in the previous year. On average, around 6,500 transactions were conducted per month in the first third of this year, a figure reminiscent of the crisis years between 2003 and 2005.

It’s worth mentioning that the recently published Bank of Israel data lacks the breakdown of mortgages by sector, which is expected to be released later this month. However, previous reports indicate that the remaining participants in the market primarily consist of affluent individuals purchasing properties valued at NIS 3 million and above. Additionally, there are also winners of “renter price” lotteries who are keen on availing themselves of the discounts they have obtained (a scheme run by Israeli authorities for individuals who qualify to apply for a discounted housing: potential buyers apply for an eligibility certificate from the Construction and Housing Ministry, which they can obtain for a one-time fee of NIS 240 ($75). Households then register for the chance to “win” the opportunity to purchase an apartment at discounted price).

These findings highlight the critical need for additional mortgage sector analysis and the implementation of comprehensive measures to stabilise the Israeli housing market and prevent a potential crisis from worsening. Proactive measures will be required to address the declining mortgage volume, dwindling transactions, rising flat prices, and ensuring housing stability and affordability for all Israelis. And, given the government’s recent success in passing the new budget, this is undoubtedly an area where it can concentrate its efforts in the near term, especially given the importance of the property sector in both the broader economy and capital markets.

<p>The post Israeli housing market faces looming crisis as mortgage volume declines first appeared on Isranomics.</p>

The second-hand apartment market has been hit particularly hard, with a 48% decrease in transactions compared to the previous year. This trend is evident across neighborhoods and cities, with Hadera, Rehovot, Tiberias, and Be’er Sheva experiencing the sharpest declines. The shelf life of apartments sold by housing developers has also increased, with the average shelf life as of February being 39 months, a 120-day increase compared to the same period last year.

Sales promotions offered by many contractors have helped prop up the new apartment market for now, but this downward trend does not stop there, with contractor sales decreasing by 27% compared to February last year. Experts attribute this trend to increasing financial pressure on contractors, which is expressed in their need to generate cash flow while the interest rate increasingly burdens their financing expenses. The cut in the contractors’ potential cash flow from sales this month is estimated at NIS 5.7 billion, a real drop of 34% compared to February 2022 and the lowest level since May 2020, with the outbreak of the Corona epidemic.

Investors are also disappearing from the local real estate scene, with a 34% decrease in investor purchases compared to February last year, and their share of all transactions in the housing market this month was only about 16%. The increase in interest rates erodes the returns on assets, which are already considered low in Israel. The flight of investors is present in all corners of the country, although it is particularly noticeable in the Hadera, Tel Aviv, and Haifa areas.

In the long term, the reduction of the apartment stock by investors may be paid for by apartment renters, who make up a third of the households in Israel. The rental market is overwhelmingly dependent on private apartment owners, and efforts to create an alternative market for institutional rentals have yet to produce significant results on the ground.

The trend towards lower-priced apartments in the periphery, against the background of the current interest rate environment, is reflected in the shift of buyers from demand areas in the center of the country to the southern periphery. This shift is also evident in recent data from the Bank of Israel, which shows that the average mortgage taken out by Israelis has been steadily decreasing in recent months.

Overall, the decline in the Israeli real estate market has implications for both the housing market and the economy as a whole. Clearly, the rising cost of financing is being felt by both builders and Israeli families. Consequently, the government will need to carefully consider market-stabilizing policies. However, until the Bank of Israel begins cutting interest rates, it is unlikely that the situation will change significantly. This action will not only provide homeowners with a sigh of relief, but it will also boost the Israeli economy.

<p>The post Declining trend: Israeli real estate market at its weakest since 2003 first appeared on Isranomics.</p>

Given that the most recent quarter showed a gain of only 0.1%, the annual rate of appreciation for housing prices has now dropped to 14.6%. This is significant, as this rate stood at a 20% mark just three months ago.

According to an unofficial index created by the Israeli business publication Globes, during the same timeframe, the market segment for new apartments experienced a 4.7% price decrease, which equates to a roughly 20% annual rate of decline. This is important and demonstrates that falling prices are no longer a theory. In shekel terms, the price decrease is meaningful, averaging NIS 90,000.

However, the woes for Israel’s real estate market do not stop here. The rental prices have been on the rise, reaching the highest annual growth rate since 2008. The housing services index, which includes rent, has risen by about 7% in the past year, pushing the market to a critical point. The reason behind such a jump could be seen in the rapid increase in interest rates, which has caused investors to raise the rent due to the mortgages they took becoming more expensive.

It is worth noting that the rise in rental prices has a direct effect on inflation, and therefore the problem encountered by apartment renters quickly reaches the CBS data and the pockets of each individual. Hence, it could trigger future interest rate hikes by the Bank of Israel.

According to published data, the monthly decline in the number of new apartment purchases is 4.3%, which is significant. And despite the fact that developers are compelled to resort to price reductions in order to sell their inventory, this currently leaves them with approximately 53,000 unsold apartments in addition to pre-sale commitments to launch projects. Therefore, if the current situation persists in the foreseeable future, there will likely be an oversupply of apartments on the market, which will inevitably result in further declines in property prices as developers will use discounts to attract buyers and clear inventory. Conversely, as the number of new apartment purchases declines, the demand for rental properties may increase. And this may result in a rise in rental prices.

Therefore, the real estate analysis of the CBS, the Chief Economist and the Bank of Israel’s mortgage review published in the last few days reinforce the assessment that the market is in rapid decline.

However, the situation is not entirely negative. People may find it easier to purchase new homes as prices fall. Nonetheless, if the government wishes to address the issue of inflation, it must first address the issue of skyrocketing rental prices. Otherwise, there is a good chance of an economic slowdown because the Bank of Israel is determined to keep raising interest rates until inflation reaches its target of 2%.

<p>The post Israel’s housing market: newly built properties decline in price while rents rise at highest pace since 2008 first appeared on Isranomics.</p>

Recently published data by the Central Bureau of Statistics (CBS) indicates a very unpleasant trend taking place in the sector: a ratio between the number of apartments entering the market to be sold and the number of units remaining at the end of a given month continued to climb. These statistics demonstrate the depth of the developing crisis that the local real estate sector has been facing in recent months.

The report reveals that property developers are dealing with difficulties in selling their inventory. This current situation is in some ways reminiscent of the environment of the 2008 market.

Even with the Corona closures that took place in 2020, sales of new apartments remained steady at around 41,000 units. The average number of months to sell a new apartment dropped from 19.6 at the start of 2019 to just 10.9 by the end of 2020. In 2021 there was a dramatic spike in apartment sales, with 58,000 units sold. The result was that a brand-new apartment stayed on the market only for nine month. But the monthly amount of sales of new apartments began to drop rapidly at the end of 2021, a few months before the series of interest rate hikes took place during 2022. Local experts anticipate the number of properties sold last year to be in the region of 39,500 units. Should this number be officially confirmed, it will mark a decrease of over 30% compared to the 2021 record.

According to the most recent data, the apartments are on the market for about nineteen months after their original listing date, or roughly twice as long as they were at the peak of the market, a level last seen in 2019.

The latest trend expresses a potentially perilous combination of a rapid increase in the number of months it takes to sell the property and the rising cost of keeping it on the market. This is not the scenario real estate players have been envisioning. And clearly, a substantial increase in their inventory and lack of activity was not something they were making provisions for, as the property market of twelve months ago was on a solid trajectory to continue rising in value. Therefore, it is time for real estate developers to prepare for any additional deterioration in the market. And for now, they can only rely on the financial cushion they managed to accumulate in the form of hefty profits during the “years of plenty.” However, this may not bring much solace to people who gambled by taking on more debt than they should have during the period of low interest rates.

<p>The post Israel’s apartment sales time doubles in eighteen months, indicating property market upheaval first appeared on Isranomics.</p>

With the increase in inflation and following the series of interest rate hikes, there are signs of a slowdown in home purchases. The weakening of demand, combined with the significant increase in construction starts recorded in the previous year, may result in property prices stalling in the near future and even leading to a moderate decrease, according to Leumi’s forecast. However, if the increase in the rate of construction starts continues and the supply-demand gap narrows, this may lead to a notable change in prices.

The CEO of Hapoalim Dov Kotler appears to concur with this view as well. Earlier in the month, he spoke at the Globes Israel Business Conference, stating, “In my opinion, the two factors of rising interest rates and supply will soon limit price increases. In fact, I have the impression that price controls are already in place.”

In addition, contractors and developers in the real estate sector have raised concerns in recent months regarding their ability to repay expensive and leveraged loans. Leumi and Hapoalim were at the core of the Bank of Israel’s audit regarding the extent of the leverage they offered to developers, which frequently exceeded 100%. This practice would be permissible in a low-interest rate environment. However, with interest rates climbing from 0.1% to 3.25% during the April-November period, a rising risk of some firms defaulting can no longer be ignored.

According to Leumi, in recent years, the growth of Leumi’s loan portfolio for real estate has been accompanied by a modest increase in financing rates. The majority of those increases were concentrated on land and residential developments in high-demand areas. However, the proportion of problematic credit risk in the construction sector remains much lower in comparison to the whole portfolio, at least at this time.

According to Leumi, the general trend of expansion in the construction sector was notable in the third quarter, which resulted in a rise in demand for business credit. Therefore, the bank stated that it is analysing the effects of the increase in interest rates and the downturn in purchasing in the housing sector on the liquidity of businesses.

However, according to the preliminary analysis, the continuing construction supply constraint will persist, generating demand for property developers over the medium to long term, and preventing a significant decrease in housing prices.

<p>The post Leumi does not anticipate big price declines in Israel’s property market next year first appeared on Isranomics.</p>