No end in sight for apartment rent rises

Rents continue to rise credit: Tali Bogdansky
Rents continue to rise credit: Tali Bogdansky

Housing rents in Israel have climbed 10.2% since the start of 2022, the Central Bureau of Statistics reports, but rises vary from city to city.

According to the Central Bureau of Statistics (CBS), housing prices have fallen for the last four consecutive months (until July) by an accumulated 1.3%, before taking into account a greater erosion because of 4% annual inflation.

At the same time, the Central Bureau of Statistics reports that rents are rising, after many years in which rents rose by far less than housing prices. The housing services index, which reflects the change in rental prices, rose 4% in the first eight months of 2023, after a 6.2% rise in 2022.

An examination of the Yad2 ads site by "Globes" reflects this uptick in rents. Rents being asked for three-room apartments have increased in the last year by about 13% on a national average. The examination of Yad2 included listings for landlords seeking tenants and tenant seeking apartments to rent. The data examines the peak market period in the summer when students are looking for apartments to rent before the start of the academic year.

A slight rise in Tel Aviv, Beersheva remains stable

At the national level, average rents in August 2023 rose by 12.7% from August 2022. In 2022 rents rose only 6.3%. Ads for renting three-room apartments increased during this period by 5.5%, while in the year before (August 2021 and August 2022) ads fell by 16.4%. In addition, the number of ad views rose by 2.4% over the last year, after falling 7.6% the previous year.

According to Yad2 data, there are differences between cities. Rent rises for three room apartments were led by Hazor HaGalilit (NIS 2,582 monthly rent) up 16%, Migdal Hamek (NIS 2,395), also up 16%, Givat Ze'ev (NIS 4,064) up 13%, and Yokneam (NIS 2,980) also up 13% over the past year. However, these towns have a limited rental market, which results in more extreme changes.

Rents for three-room apartments in Tel Aviv rose in the last year only 5.6%, about NIS 350, to an average NIS 6,574. This is a relatively moderate increase, which is explained, among other things, by the fact that last year there was a 25% increase in rents. In total, over the last two years, the average rent for a three-room apartment in the city has risen 32%.

In Jerusalem, monthly rents have risen 7% in the past year, to an average of NIS 5,037. Over the last two years, rents in the city have risen 18%.

In Haifa, monthly rents have risen 6% over last year to NIS 3,260, after rising 9% in 2022. However, in Haifa there has been a sharp 54% decline over the last two years in the number of ads posted on Yad2. On the other hand, there was a similar number of ad views, suggesting stability and that demand has not waned.

Netanya has stood out in the last two years for an exceptional rise in rents for three room apartments, increasing 20% to NIS 4,307 per month. Also in Netanya, like Tel Aviv, most of the increases were recorded in 2022.

On the other hand, Beersheva is very notable for its rent stability. In the last two years, monthly rents for a three room apartment have risen by just 3.5%, to NIS 2,500 a month, including a 1.5% rise over the past year. This is an increase of just NIS 36.

Rents rise returns fall

Since the start of 2022, the rental market has been in a paradoxical situation. Although rents are rising, returns to the landlords on those rents are falling because of a range of problems led by the rise in interest rates over the past 18 months.

There are three major players in the rental market - tenants, investors, and the government, contributing either directly or indirectly to rent rises. None of them, even investors, are benefitting from the current situation.

The first and direct lever for rent rises are the investors. They examine the rent according to the price of the apartment they purchased and the associated costs, including financing costs, the increase in the value of the apartment and the monthly rent they receive, which creates their annual return. In recent years, investors have mainly seen apartment prices rise, and the issue of rental yields interested them much less.

In 2021-2022, for example, apartment prices jumped by an average of 30%. Such a jump means a decade of rental income. In this situation, it is clear why they did not press for an increase in rent.

But the reality has completely changed recently. It is no longer possible to bank just on price increases. On the contrary, apartment prices have begun to fall, while financing costs have increased significantly due to the interest rate hikes, offsetting net yield. Investment alternatives have also changed radically, and investors have no problem finding much better returns through simple and solid banking channels.

This reality has been a game-changer, and led to investors no longer being satisfied with their returns from existing assets (about 3% gross on average). Therefore, they are working to increase the rental prices.

Tenants also have factors contributing to rent increases. Over the last year there has been a decrease of about 40% in the number of apartments purchased. A major part of this is also explained by the steep rise in interest rates, which has led to a situation where many people who would like to buy an apartment, simply cannot afford to. The result is that they continue to rent an apartment, while new young people who wanted to purchase an apartment have no choice but to join the rental market. In other words, while demand for buying apartments is on the decline, the demand for renting apartments is rising and putting pressure on rents to rise.

All eyes on the government

The other player in the market is the government, which is working to reduce the share of investors in the rental market mainly, through high purchase tax, equivalent to almost three years of rental income. This, based on the assumption that the investors are "hijacking" apartments from the young couples and causing prices to rise.

At the same time, owners of rental apartments have preferred in recent years to get out of the market (the current returns as mentioned are not necessarily profitable) and invest in other alternatives, including real estate abroad. According to Ministry of Finance data, in the last seven years over 30,000 apartments have been removed from the inventory of apartments for rent. This situation cuts the supply of apartments, and acts as an additional lever for raising rents.

The government has promised more than once that it will create a massive long-term rental market here, but given the new interest rate, most of the land auctions fail and the construction rate is far from making up for the apartments that are disappearing from the market.

Published by Globes, Israel business news - - on September 20, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Rents continue to rise credit: Tali Bogdansky
Rents continue to rise credit: Tali Bogdansky
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