Price rises push homebuyers away from Tel Aviv

Tel Aviv credit: Shutterstock
Tel Aviv credit: Shutterstock

The proportion of housing deals in demand areas in Tel Aviv and central Israel declined last year compared with 2021.

Israeli homebuyers in 2022 sought apartments in increasing numbers in peripheral regions, mainly in the south, where prices are relatively low. Consequently, the proportion of deals in demand areas in Tel Aviv and central Israel decreased compared with 2021, according to Central Bureau of Statistics data for the last quarter of 2022. The data also show that larger numbers of buyers preferred to purchase smaller apartments compared with previous years, presumably because of rising housing prices.

The real estate market is in a state of uncertainty. On the one hand, apartment prices are at an all-time high. An average apartment purchased in the last quarter of 2022 reached an average price of NIS 1.96 million, and the average price of a four-room apartment in Israel reached NIS 1.97 million. On the other hand, the public perception at the moment is that prices have peaked, and there could now be a steep decline and this is reflected in the very small number of deals and a significant fall in the prices of new apartments.

The contradiction: Demand is falling but prices are still rising

A glance at the average apartment prices in various Israeli cities shows that despite factors suggesting a major slowdown in the sector, such as more expensive mortgages, prices of apartments purchased in the last quarter of 2022 were higher than those purchased in previous quarters.

This can be explained by two reasons: the first - the crisis that is often talked about is manifested at this stage mainly in the decrease in the volume of deals. This is only one component of a crisis. The second component is price drops - and this is not happening yet. Although there was a significant decrease of 4.3% in the last two months in the index of the prices of new apartments purchased on the free market (an unofficial index based on Central Bureau of Statistics data, which, unlike the official index, does not include apartments purchased at subsidized prices). But the overall index continues to rise - although by a few tenths of a percent. This indicates that the second-hand apartment market, which makes up about three quarters of the entire market, is still recording rises.

The second reason is the mix of buyers. Surveys conducted by the Bank of Israel on this mix of buyers show that the interest rate hikes in recent months mainly drove away from the market buyers of apartments in the NIS 1-3 million price range, but less so the buyers of apartments at higher prices. Buyers of expensive apartments are more affluent, and can better afford their mortgage repayments even when interest rates rise. More evidence for this explanation can be found in the data showing that prices of apartments purchased recently are higher than previously. The reason for this is apparently not the price increases, but the weight of the more expensive apartments - which has increased.

The change in the mix of apartments purchased

How are buyers coping with the price rises? The data show that the annual increase in apartment prices is 17.1%. The interest rate increases, as mentioned, has driven away some buyers who wanted to purchase relatively cheap apartments. But a closer examination of the data show that there has also been a change in the geographic mix of purchases: a large increase in purchases in the periphery - the south and the north - and a significant decrease in purchases in higher demand areas.

In 2021, about 18% of apartment purchases were made in the Tel Aviv district, while in 2022 the number dropped to about 14%. About 26% of the apartments purchased in 2021 were in the Central District, while last year the figure dropped to about 24%. In the Haifa district, the proportion of purchases fell from 16.6% to 16%. On the other hand, home purchases in the North rose from 10.2% to 11.6%, and the most significant increase was recorded in the South - from nearly 19% to almost 23%. Purchases in the Jerusalem district rose from 8.5% to 9% with deals in Beit Shemesh contributing to this increase. A recent survey by the Ministry of Finance chief economist found that Beersheva serves as a refuge for many young couples, due to the relatively cheap prices there.

Another issue examined was the extent to which changes in apartment prices led buyers to compromise on apartment size. The differences between 2022 and 2021 were very small. But a comparison between 2017 and 2022 shows that the proportion of small apartments in purchases increased from about 34% to about 36%, the weight of large apartments recorded a slight decrease but remained around 28%, while 4-room apartments reached a weight of 36% in 2022 compared to 38% in 2017.

Our assessment is that the small changes that took place between 2021 and 2022 were due, among other things, to the increase recorded in purchases in the periphery, where purchasers could buy at more reasonable prices larger apartments than they could buy in central Israel.

Tel Aviv continues to widen the gap

Regarding 4-room apartments whose sale was recorded in the last quarter of 2022. In Tel Aviv, the most expensive city, the average price of a four-room apartment reached NIS 4.9 million, compared with Beersheva the cheapest city, where the average price was NIS 1.2 million. In recent years, apartment prices in Tel Aviv have not only broken every possible record - the gap between them and apartment prices elsewhere has widened considerably. For example, the average price of a four-room apartment in Tel Aviv was four times that of Beersheva at the end of 2022, while in 2017 it was only three times higher. The gap between prices for four-room apartments in Haifa and Tel Aviv widened from 2.4 times to 2.7 over this period, and the gap between Tel Aviv and Jerusalem, widened more moderately from 1.6 times to 1.7.

This largely explains the shrinking of the Tel Aviv market. It turns out that even relative to its neighbors - Ramat Gan, Rishon Lezion, Petah Tikva and Holon - Tel Aviv has widened the price gap over the last five years.

Published by Globes, Israel business news - - on February 26, 2023.

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

Tel Aviv credit: Shutterstock
Tel Aviv credit: Shutterstock
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