The Israeli real estate market is allegedly experiencing a price decrease for newly constructed properties, as stated in recently published reports. The broader market trend appears to be also heading in this direction in the not-too-distant future, despite the fact that it is still rising.

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%.