The sharp rise in home prices in recent months, against the backdrop of the enormous challenges facing Israel today, is almost a mystery. Explanations for the demand for homes include huge incentives in the purchase conditions granted by developers, which price indices do not weigh. The volume of new construction is also pleasantly surprising, and despite the manpower crisis, it maintains a high supply level.

In May and June, home prices in the Israeli housing market continued to increase at a rate of almost 1% per month, and according to the latest index published by the Central Bureau of Statistics (CBS) in mid-June, the price trend has already changed, from an annual rate of decline of 2% to an annual rate of price increases of 2%, in just five months. But, judging by those five months in which prices rose again, the rate of increase is significantly higher and stands at almost 1% per month, and overall, at a rate of increase of 10-12 % per year.

Higher Prices Reflect Attractive Payment Terms

This sharp price increase is a phenomenon that requires explanation, given that the price level is already elevated, and the prime interest rate is still high at 6%, especially considering the economic difficulties that the country is facing due to the war. One of the most logical explanations for the increase in prices is the aggressive sales and marketing activities of developers following the slowdown experienced in recent years. Many began to offer unprecedented purchase terms on new homes in Israel, such as 20:80 — the payment of 20% at the signing of the contract and an additional 80% only on the day of delivery, which may arrive several years later, without interest and linkage. Sometimes, this promotion is even offered in a version that only requires 10% of the payment upon signing. This is a benefit worth hundreds of thousands of shekels, which home price indices currently do not factor in, and thus, a distortion may be created. On July 1, the Central Bureau of Statistics announced that it would begin weighting the benefit in future CPI publications, which will effectively reflect lower purchase prices.

Sharp Rise in Demand for Homes And Mortgage Volumes as Buyers Return to the Market

The volume of transactions made in recent months has also increased sharply, and this figure is easier to explain. The year 2023 was characterized by transaction levels tens of percent lower than the norm, even before the war broke out, due to the increase in interest rates and buyers’ expectations of falling prices. In the meantime, the interest rate has stabilized, expectations of price declines have been falsified, and buyers are returning to the market. The strong demand for homes in Israel that characterizes the market is also doing its job (the country with the highest natural growth in the West), as is the anticipation of rising prices that affect those who intend to purchase a home.

Thus, for example, in April (the last month for which data were published), there was a jump of almost 80% in the number of homes purchased in Israel (new and second-hand), which stood at around 6,900. This robust activity in the market seemed to continue into May, as data recorded in the Israeli mortgage market that month shows that NIS 7.8 billion was taken by borrowers, the highest figure since August 2022.

Another notable fact is the warming up of the housing market in the central Dan region — especially in Tel Aviv. The latest data published on the subject made it clear that the resurgence of demand has reached Tel Aviv as well. During the months of February to April of this year, more than 600 new apartments and 475 second-hand apartments were purchased in the city, representing an increase of 60% and 41%, respectively, compared to the previous three months. In Jerusalem, the number of transactions was even greater, with about 820 second apartments and about 500 new apartments purchased there during the same period.

Investors Are Back, but Foreign Residents Are Not Mass-Buying

One explanation for the market’s awakening and the increase in transactions is the return of home buyers for investment. According to Ministry of Finance data from June, investors purchased 1,175 homes in April, more than double last year, and their share of all transactions rose to 16% after recently fluctuating between 12 and 14%.

There was also an increase in the volume of purchases among non-residents, but these figures remain low. In April, only 134 apartments were purchased by non-residents, an increase of 83% compared to April of last year and 30 more than the amount they purchased in March. Nonetheless, these numbers are still significantly lower than the expectations for foreign demand for homes in Israel voiced by industry sources since the outbreak of the war.

Supply Levels Are Surprisingly Still High

If there is a certain bright spot in the data, it is actually on the supply side. After nine months of war, during which the construction industry suffered from a severe manpower shortage and disruptions in the supply of raw materials, one might have expected that a serious supply problem would develop that would also contribute to a sharp price increase. Surprisingly, however, to date this worrisome scenario has not occurred.

At the end of April, according to the CBS data, about 66,000 new apartments were registered “on the shelf,” meaning apartments that have not yet been sold are offered for sale. Although this is a slight erosion of the supply level compared to the end of 2023, when more than 68,000 homes were registered, it is still one of the highest supply levels ever.

One of the reasons for this is that, as of today, the prophecies of outrage about an almost complete halt in construction due to the cessation of work by Palestinian workers in Israeli territory have not been fulfilled. According to data published at the end of June, construction began on 16,000 apartments in the first quarter of the year, reflecting a slight decline compared to 2022, which was a record year but still a relatively high level of construction compared to recent years and especially given the circumstances.

“Yerushalayim Habnuya”

Jerusalem is largely responsible for the high level of new construction, even in these complex times. Last May, it crossed the one million population threshold. Approximately 6,800 apartments began to be built there within 12 months (April 2023 to March 2024), more than in Tel Aviv, where 5,300 apartments began to be built during the same period.

The fact that the largest city in Israel is also the one that builds the most number of apartments makes sense, but in the case of Jerusalem, this is a development of the past year, since for many years, the city was built at a pace befitting a medium-sized city, at an annual rate of only about 1,500-2,000 apartments. In other words, the city’s construction rate has quadrupled in a matter of years, and judging by the number of construction plans currently being advanced in the city, Jerusalem is expected to continue to grow in the coming years as well. For private real estate consultation, debbie can be reached at [email protected].

The writer is the founder of Buyitinisrael.com, Israel’s real estate marketplace, guide, and news platform, and host of the “On The House” podcast.