Ten days ago, a small piece of history was made at the G City Real Estate Institute at Reichman University (IDC Herzliya): the quarterly index of home prices that the institute compiles using the "repeat sales method" did not include Tel Aviv. (The method, used for the Case-Shiller Home Price Index in the US, is based on data on properties that have sold at least twice, in order to capture the true appreciated value of each unit).
Dr. Efrat Tolkowsky, who is the director of the institute, explained that data on too few transactions were gathered in the third quarter, so that the index method could not be applied to Tel Aviv. Tolkowsky is liable to feel the stagnation personally, as she is also joint chairperson of Eco City - SL Initiative and Construction Ltd. and a director of Azorim Living. At any rate, in recent weeks, there have been more and more reports from real estate players active in the city that the market has dried up.
Prices putting buyers off
These are strange times for the Israeli real estate market in general, and for Tel Aviv in particular. This is manifest in transaction volumes that put the market back years. In fact, there hasn’t been a decline like this since the bursting of the dot.com bubble twenty years ago. As was stated in "Globes" last week, the momentum of the decline in the quantity of transactions is such that the crisis is only at its start, and it is not clear how far it will go.
Tel Aviv is the most sought-after city in the country, but the high prices there and the economic situation are putting off more and more potential buyers, and the result is a sharp decline in the number of transactions there, even by comparison with the general decline in the real estate market. Furthermore, figures from the Central Bureau of Statistics and the Ministry of Finance show that the declining trend started even before interest rates started to rise, and that it has strengthened in the past few months. In September-October 2022, 56% fewer residential real estate transactions took place in Tel Aviv than in the same period in 2021.
"We are feeling a steep decline in deal numbers in projects of contractors whom we advise, sometimes a complete halt," says appraiser Arie Kamil of Kamil Treshanski Refael, Real Estate Services.
From his contacts with buyers and developers, it emerges that some buyers are sitting on the fence, while some, investment buyers, are considering switching to investment channels other than real estate. "The price of money has risen, and they are now examining alternatives for investing their cash. The annual return that you receive on an apartment is a little over 2%, and the rise in apartment prices has reached a peak in the past year, so why take the risk? Financial instruments give the same return."
Just 79 investment purchases in October
Indeed, these days investors are looking at other investment possibilities rather than apartments in Tel Aviv. Over the years, the proportion of investment buyers among those buying residential property in the city has been around 30% , including in the recent period, but the numbers are steadily falling, and last October they bought just 79 apartments.
Kamil says that most purchases now are by move-up buyers and parents buying apartments for their children. "The rest of the buyers are all waiting. That includes tech workers, who were buying apartments here last year at high prices. It’s a difficult period, people are being laid off, or feel in danger, and work in technology isn’t tenured like working in the municipality. They have no reason to buy an apartment precisely now."
The decline in home purchases in Tel Aviv in relation to the rest of the country began in the second half of last year. Until then, the Tel Aviv market amounted to 5.5-6% of the real estate market in Israel as a whole (apart from an exceptional month in June). In the third quarter of last year, the proportion fell to about 5%. In October-November there was an artificial jump because of the impending rise in tax on investment purchases, followed by a sharp fall in December. For most of 2022, the proportion of deals done in Tel Aviv was under 5%, and in December it fell below 4%.
Two conclusions can be drawn from these figures. The first is that the Tel Aviv market is slowing much more than the Israeli market as a whole. The second is that the slowdown started well before the interest rate rises than began in April 2022. There are several possible reasons for the more pronounced slowdown in Tel Aviv. The first and simplest is the extraordinary rise in prices in the city in 2021 and until a few months ago. According to Central Bureau of Statistics figures, in the final quarter of 2021 apartments in Tel Aviv were bought at an average price of NIS 3.6 million, and by the third quarter of 2022 the average price was NIS 4.1 million. There’s no doubt that prices like these deterred many potential buyers.
Another cause is, as mentioned, the rise in purchase tax on investment purchases, making it equivalent to almost four years’ return on renting out the apartment. Until recently, buyers relied on the rise in property values to compensate for that, but, as Kamil said, those days are behind us.
The third cause is the rise in interest rates, the effect of which can be seen in the numbers. In the first quarter of 2022, over 550 apartments were sold in Tel Aviv monthly. From April, the number fell to around 450, and since August the number of sales has not even reached 400 a month.
Central Bureau of Statistics figures for purchase of new homes also indicate a steep decline in Israel’s real estate capital. Between August and October 2022, 270 new apartments were bought in the city, and it reached only fifth place for new apartment sales, after Jerusalem, Kiryat Gat, Netanya, and Ashkelon.
The natural question to ask in the light of these figures is whether the fall in demand entails a fall in prices. "Up to now, the decline has not been accompanied by falling prices," Kamil says. "We are seeing special offers by developers, but prices still remain where they were three or four months ago. You see secondhand apartments that have been on the market for a long time, and perhaps people have now started to compromise and lower their prices, but we have no information about that."
The factors that have depressed activity in the Tel Aviv market are still with us, and each pushes in the direction of continuation of the trend: high prices, high taxation of investment purchases, and interest rates. None of these is going away. The slowdown can therefore be expected to continue into the near future. Of the three factors, however, price seems to be the weakest, and it would appear to be only a matter of time before prices start to fall.
Published by Globes, Israel business news - en.globes.co.il - on January 4, 2023.
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