Housing price rises in Israel could be set to end

Israeli apartment buildings Photo: Shutterstock
Israeli apartment buildings Photo: Shutterstock

Prices may still be rising but appraiser Erez Cohen explains why the country's real estate market is about to change.

For almost two years the housing price index has moved in one direction - upwards and sharply. In the spring of 2020, after the initial shock of the Covid pandemic faded, demand for housing rose sharply, while building starts were falling. The inevitable result was a rise in prices, fueled by zero interest rates and a reduction in purchase tax for investors. The effect is still being felt. But since the start of 2022, signs are growing that the market is about to reach a turning point, which could be reflected in the sharp price rises moderating and a major slowdown in the number of deals.

The first and most powerful sign was the announcement by the Bank of Israel that it plans to start gradually raising interest rates in the coming months. More than any other factor, it has been the low interest rate in recent years that has fueled the housing market, with huge amounts of cheap money including hundreds of billions of shekels in credit extended to developers and tens of billions more to buyers for mortgages. The interest rate hike will pour water on the market and dampen demand for apartments and land.

Added to that the Bank of Israel has put a spoke in the wheels of increasing the exposure of the banks to the real estate market. Over the past two years of cheap interest rates, the banks have significantly increased their exposure to the real estate industry until two months ago when the Bank of Israel instructed them to price credit according to the higher level of risk due to their major exposure to the market.

Another factor that very much influenced the rise in apartment prices over the past year was the flourishing of Israel's tech sector, which in 2021 saw an exceptional number of stock market IPOs, investments and acquisitions for unprecedented amounts. This resulted in tens of thousands of newly wealthy people and contributed to the sharp rise in housing prices, mainly in Tel Aviv and other affluent locations. In the salubrious neighborhoods of Tel Aviv, homes have been fetching as much as NIS 70,000-80,000 per square meter because there were people who could pay it. This has changed in 2022 and not for the better. Since the start of the year alone, the Nasdaq index has been falling, with 20% wiped off the value of companies in a very short while.

The final and most unexpected factor has been the startling outbreak of the biggest war in Europe in nearly 80 years after decades of peace and prosperity as Russia has invaded Ukraine. This was a black swan that has hit the global economy although it is too early to assess its fall implications. The most tangible influence so far is a further rise in building inputs due to a rise in fuel prices for transporting raw materials like iron, aluminum, concrete and more. This brings about a further rise in prices, which will surely be passed onto the consumer but the purchasing power of the public is actually in decline. In such a reality, developers will be forced to bear part of the higher costs themselves, or moderate the pace of their sales.

All this does not mean that prices will start to fall and certainly not immediately. It is worth taking into account that that the Israeli housing market has several attributes pushing prices higher, the most significant of which is a chronic shortfall in supply, with an expected influx of immigrants from Russia and Ukraine. In addition, the culture of buying apartments whether for living in or as an investment is deeply embedded in part of the Israeli public. However, there is a combination of circumstances detrimentally affecting the market that must be disturbing those in engaged in the various aspects of real estate.

The author is a real estate appraiser, legal expert and former chairman of the Israel Real Estate Appraisers Association

Published by Globes, Israel business news - en.globes.co.il - on March 15, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Israeli apartment buildings Photo: Shutterstock
Israeli apartment buildings Photo: Shutterstock
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