The Israeli real estate market continues to experience rising prices, yet signs of a slowdown and mounting challenges for developers suggest a shift in the industry. According to the latest report from the Central Bureau of Statistics (CBS), apartment prices rose by 0.4% in December, marking an overall annual increase of 7.3% in 2024. However, the pace of price growth has been moderating, with most of the increases occurring in the first third of the year. At the same time, real estate remains to be one of the main sectors in the Israeli capital markets, with many publicly traded companies on the Tel Aviv Stock Exchange (TASE). Given the current market conditions, investors are evaluating whether buying shares in these companies remains a viable option.

Despite the ongoing price appreciation, the housing sector faces significant headwinds in 2025. Recent reports indicate that real estate firms and their financial backers are reassessing their positions as they navigate a challenging economic environment. Rising supply, shifting buyer sentiment, and financial pressures are among the factors shaping the current market dynamics.

One of the primary concerns is the record-high supply of new apartments. The housing stock has reached approximately 76,000 units, a consequence of the real estate boom in 2021 that spurred large-scale construction projects now reaching completion. However, demand remains moderate, creating an imbalance that puts developers in a precarious position.

Unlike in previous market cycles, many projects cannot be delayed due to contractual obligations. Government-backed affordable housing schemes and urban renewal initiatives require developers to proceed with construction regardless of market conditions. The CBS report highlights this trend, showing a 90% surge in new home sales in December, yet building permits soared even more dramatically by 130%, adding 4,000 additional housing units to an already saturated market.

To counter rising borrowing costs, developers have increasingly relied on financing incentives such as the 20-80 payment plan, where buyers pay only 20% upfront and the remaining balance upon project completion. This model gained traction in 2023 but reached its peak in 2024, with nearly 50% of new home sales utilizing such schemes. However, financial reports indicate that these incentives are losing their appeal, with developers now offering even more lenient plans, such as 15-85 payment structures. Despite these efforts, buyer interest in new homes has declined in the latter half of 2024.

Monthly home sales have been falling at an average rate of 5%, reflecting a broader market slowdown. Even December, which saw a notable uptick in transactions (5,900 homes sold), failed to reverse the trend. This suggests that developers and banks may need to introduce additional measures to attract buyers in 2025.

At the same time, construction costs continue to rise, further squeezing profit margins. The CBS construction input index increased by 2.6% in January alone, bringing the total annual rise to 5.3%. The primary driver behind this surge is higher labour costs due to a shortage of approximately 100,000 Palestinian construction workers since the onset of the recent conflict.

Previously, developers could offset rising costs by linking home prices to the construction input index. However, regulatory changes implemented in mid-2022 now limit this linkage to only 40% of a home’s price, forcing developers to absorb a larger share of cost increases. Some companies have even opted to waive price indexation altogether in promotional campaigns, further eroding profitability.

As a result of these factors, real estate firms are facing financial strain. Data from the Bank of Israel indicates that publicly traded construction companies reported an average profit margin of just 2% in 2024, a stark contrast to the 14% margins recorded three years prior. Some developers are even absorbing part of the recent VAT hike on new home prices to maintain sales momentum.

While the market remains in flux, the coming months will be crucial in determining how developers, banks, and policymakers adapt to these evolving challenges. With a surplus of housing, rising costs, and cooling demand, Israel’s property sector will have to make decisive changes in order to maintain its profitability.