Israel’s decade-long house price boom could be over, as government cooling measures intensify

August 31, 2017


Israel house pricesWeighed down by government cooling measures, the average price of owner-occupied dwellings in Israel fell by 1.53% during the year to Q2 2017 (-1.93% in real terms), to ILS1,423,000 (US$392,414), from annual price rises of 3% in Q1 2017, 5% in Q4 2016, 5.2% in Q3 2016, 4.4% in Q2 2016, and 5.7% in Q1 2016, according to the Central Bureau of Statistics (CBS). It was the first y-o-y decline since Q1 2012.

On a quarterly basis, nationwide house prices fell by 3.8% (4.3% in real terms) during the latest quarter.

The area covered by the Center and Jerusalem Periphery Towns saw the highest price increase during the year to Q2 2017, with prices rising by 9.3%. It was followed by Gush Dan (7.4%), Qrayot Haifa (3.4%), and Jerusalem (2.6%). Other districts that experienced minimal year-on-year house price rises included the Northern district (1.3%) and Sharon (0.1%).

On the other hand, Haifa saw the biggest house price decline during the year to Q2 2017, with prices falling by 2.8%. It was followed by the Southern district (-1.6%) and Tel Aviv (-0.3%).

The country’s most expensive residential area is Tel Aviv, where the average price of owner-occupied dwellings was ILS2,769,600 (US$763,759) in Q2 2017. It was followed by Jerusalem at ILS1,897,900 (US$523,375), Sharon at ILS1,875,300 (US$517,143) and Gush Dan at ILS1,819,500 (US$501,755). The North had the cheapest housing in Israel, with an average price of ILS960,200 (US$264,790).

“The factors that have apparently influenced the decline in activity include the increase in mortgage interest rates, against the background of the regulatory measures instituted by the Banking Supervision Department, and the taxation measures adopted to rein in investors – the increase in purchase tax and the taxation of third apartments,” said the Bank of Israel (BOI) report.

Israel has experienced dramatic house prices rises in the past nine years (with the exception of 2011), despite domestic political uncertainty, security threats, and the global financial meltdown. In fact, house prices have risen by 112% (77% in real terms) from 2006 to 2016.

  • The average price of owner-occupied dwellings rose by 4.1% (-0.47% in real terms) in 2008
  • Property prices rose by 22.35% (18.15% in real terms) in 2009
  • Property prices rose by 17.04% (14.16% in real terms) in 2010
  • Property prices rose by just 0.04% in 2011, but when adjusted for inflation, prices actually dropped 2.39%
  • Property prices rose by 5.82% (4.12% in real terms) in 2012
  • The average price of owner-occupied dwellings rose by 7.38% (5.38% in real terms) in 2013
  • Property prices rose by 7.21% (7.41% in real terms) in 2014
  • Property prices rose by 5.99% (6.88% in real terms) in 2015
  • Property prices rose by 4.97% (5.24% in real terms) in 2016

The main reason for the surge in house prices has been the supply shortage, due to low construction volumes. Other factors contributing to the house price boom have included the central bank’s expansionary monetary policies, and the lack of alternative investment options.

“Real estate accounts for 19% of gross domestic product directly and another 13% indirectly,” says Elli Kraizberg, a professor at Bar-Ilan University. “Real estate accounts for not less than 40% of the public’s total wealth.”

However since summer of 2011 when thousands of Israelis set up protest camps over worsening housing affordability in the country, home prices have been atop the government’s political and economic agenda.

  • The government, which controls most of Israel’s land, boosted dwelling starts to more than 53,000 annually in 2015 and 2016 – the highest since 1997 – to address the supply shortage.
  • To deter speculative buying, the Finance Ministry increased purchase taxes and introduced an additional levy on owners of three or more apartments. As a result, the percentage of investment transactions dropped sharply from 40% of total transactions in early 2015 to just about 15% in February 2017, according to the BOI.
  • Since 2015, the government has intensified its sale of land at discounted prices to contractors, who must then sell apartments at below-market prices.
  • Israelis who do not own a home may vie for apartments through a lottery system that will award a record 15,000 new homes later this year.
  • In July 2017, the government approved a plan to strengthen the country’s long-term rental market, including the introduction of tax breaks to encourage the construction of rental units.

“We are waging a war on prices. What’s clear is that real estate prices are over-stretched,” said Finance Ministry chief economist Yoel Naveh. “I think the market will stabilize and maybe prices will go down a bit,” Naveh added.

The economy is expected to expand by 3.4% this year, after growing by 4% in 2016, 2.5% in 2015, 3.2% in 2014, 4.4% in 2013, 2.4% in 2012, and 5.1% in 2011, according to the BOI. The Bank of Israel kept its benchmark interest rate at a record low of 0.1 in July 2017, in an effort to boost economic growth while maintaining price and financial stability.

Recent history: house price rises cause social protests

Israel Avg prices occupied dwellings

During the global crisis Israel enjoyed double-digit house price rises. The highest house price increase was recorded in Tel Aviv, at 41% between Q1 2008 to Q4 2009. Only the Northern district registered a single-digit house price growth of 4.7%. The average price in Israel rose 24.2% between Q1 2008 to Q4 2009.

The central bank then raised the benchmark rate four times to 1.5% in April 2010, as the Israeli economy recovered from the global crisis. Then in August 2010 the key rate was again raised to 1.75%, in a move to cool Israeli house prices and prevent a housing bubble. CBI rate hikes continued until the key rate reached 3.25% in June 2011.

From Q1 2010 to Q2 2011 average house prices in Israel rose almost 13%. 

One result was a social protest movement, which began in July 2011 with a Facebook group protesting Israel’s rising cost of living (specifically housing costs) as well the worsening condition of public services.  Nationwide house prices rose  by a meagre 0.53% from Q3 2011 to Q1 2012, while over the same period, house prices fell in Tel Aviv (-3.06%), Sharon (-2.93%), Gush Dan (-2.26%), and Jerusalem (-1.22%).


  Second Intifada (Q3 00 – Q2 03) (Q2 03 – Q1 06) Israel – Hezbollah War (Q1 – Q4 2006) (Q4 06 – Q4 07) Global economic crisis (Q1 08 – Q4 09) (Q1 10 – Q2 11) Israeli social justice protests (Q3 11 – Q1 12) (Q2 12 – Q4 16)
Israel -6.47 28.09 -11.60 4.90 24.20 12.99 0.53 31.7
Tel Aviv -16.60 25.50 -12.60 22.37 41.27 8.26 -3.06 40.5
Center 6.77 10.21 -12.12 16.22 34.61 20.34 0.21 34.0
Southern 11.96 -0.78 8.93 6.84 29.10 15.26 2.77 40.8
Jerusalem -3.86 36.77 -6.05 5.05 20.13 14.23 -1.22 24.9
Northern 1.57 0.07 -8.00 -4.40 4.66 51.46 5.13 34.7
Haifa -10.34 -0.68 -10.26 -8.47 29.85 23.54 9.82 37.0
Metropolitan Areas
Sharon 1.81 26.25 -10.08 9.33 32.91 9.33 -2.93 32.4
Gush Dan -2.24 5.22 -5.70 5.80 33.08 10.97 -2.26 40.8
Qrayot Haifa 6.15 -6.26 -2.81 -10.51 18.33 25.40 13.93 43.8
Source: Central Bureau of Statistics

House prices in the country then rose 25.4% from Q2 2012 to Q4 2015, with all districts registering double-digit increases over the period. Israel’s housing market has been unscathed by the Syrian civil war.

Property sales falling

Israel new dwellings sold

After record sales of almost 31,600 units in 2015, property demand has been falling since last year as mortgage interest rates continue to rise. In 2016, sales of new dwellings fell by 5.4% y-o-y to 29,878 units, according to the CBS.

During the first half of 2017, new dwellings sold plunged 16.9% to 13,569 units as compared to the same period last year.

Residential property sales have fallen in all districts, except Haifa.

  • In the Center, new dwellings sold plummeted by 34.3% y-o-y to 3,503 units in H1 2017.
  • In Jerusalem, new dwellings sold fell by 28.4% y-o-y to 937 units over the same period.
  • In Judea and Samaria Area, new dwellings sold fell 23.7% y-o-y to 439 units.
  • In Tel Aviv, new dwellings sold fell by 20.5% y-o-y to 2,368 units.
  • In the Northern district, new dwellings sold fell by 13.2% y-o-y to 1,226 units.
  • In Southern district, new dwellings sold fell slightly by 0.3% y-o-y to 2,281 units.
  • Haifa is an exception, with new dwellings sold rising by 15.7% y-o-y to 2,815 units.

Residential construction activity mixed

While completions have risen, dwelling starts have fallen, in tune with falling demand. Still, current dwelling start totals are way above earlier periods.

Israel residential construction

Completions were up by 5.4% y-o-y in 2016, the highest since 1999, and increased by 15.4% y-o-y during the first quarter of 2017.  About 25% of all completions were in the Central district, followed by the Tel-Aviv and Northern district, with 21.6% and 18.6% shares, respectively.

Dwelling starts fell by 0.4% y-o-y in 2016, yet the 53,239 units completed was far higher than the annual average of 46,300 units from 2011 to 2015 and 33,000 units annually from 2001 to 2010.   Dwelling starts fell by 8% in Q1 2017 from a year earlier, according to the CBS.

Mortgage interest rates rising, despite record low key rate

Israel mortgage rates

Mortgage interest rates in Israel are now rising gradually. In July 2017, the average mortgage interest rate in Israel was 3.71%, up from 3.19% in July 2016 and 2.21% two years ago.

By loan term:

  • Up to 5 years: 3.59% in July 2017, up from 3% a year earlier and 2.05% two years ago
  • From 5 to 10 years: 3.03%, up from 2.78% a year earlier and 1.77% two years ago
  • From 10 to 15 years: 3.51%, up from 3.17% a year ago and 2.16% two years ago
  • From 15 to 20 years: 4.03%, up from 3.54% a year ago and 2.55% two years ago
  • From 20 to 25 years: 4.16%, up from 3.66% a year ago and 2.73% two years ago
  • More than 25 years: 4.16%, up from 3.76% a year earlier and 2.77% two years ago

Israel key interest rate

After the financial crisis, the central bank cut the key rate by 375 basis points from October 2008 to April 2009 to a record low of 0.5% in April 2009. But Israel was less affected by the crisis than expected, and by June 2011 key rates were back up to 3.25%.

In October 2011 the rate hikes stopped, and instead, the BOI lowered the key interest rate.  It was the beginning of continuous rate cuts over succeeding years. In March 2015 the key rate hit a record low of 0.1%, where in its most recent statement the central bank kept it:  “The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range,” said the BOI

The increase in housing loans unlikely to threaten financial stability

Housing loans rose by an average of 7.5% per year from 2007 to 2016, with an exception in 2015 when housing loans declined by 3.9% from a year earlier. In June 2017, total housing loans outstanding increased 4.7% y-o-y to ILS313.49 billion (US$87.21 billion), according to the BOI.

“Housing credit and credit to the construction and real estate industry as a share of total domestic credit to the nonfinancial private sector increased from about 37% in 2008 to about 52% in 2016, although the growth rate moderated significantly in the past year,” said the BOI in its Financial Stability Report for the first half of 2017.

Israel housing loans

Despite this, the mortgage market has expanded less than expected and was only around 25% of GDP in 2016, almost the same ten years ago. This is a modest level of borrowing in a developed country. 

Though housing debt constituted more than 67% of total household debt in Q1 2017, households in Israel still have a large surplus of assets over liabilities. In fact, the ratio of household debt to GDP has increased only mildly in recent years and is low by international standards.

“A continuation of the apparent moderation in activity in the real estate market and in the pace of housing price increases in recent months will lead to a decline in the risk level of the financial system,” noted the BOI.

This means that the mortgage market remains healthy, despite the continued rise in total housing credit.

Poor yields; modest rent increases

Israel average rents

Gross rental yields on apartments in Tel Aviv are very low, supporting the view that properties are somewhat overpriced. Yields ranged from 2.6% to 3.1% in August 2016, based on the Global Property Guide research, with smaller apartments having higher yields.

Nationwide rents increased slightly by 1.2% in Q2 2017 from a year earlier, to an average of ILS3,758 (US$1,045) per month, according to the CBS.

By district:

  • Tel Aviv has the most expensive rents in the country at an average of ILS5,532 (US$1,539) per month in Q2 2017, up 0.4% from a year ago
  • In Jerusalem, the average rent increased 1.6% y-o-y to ILS4,133 (US$1,150) per month in Q2 2017
  • In Haifa, the average rent rose by 0.9% y-o-y to ILS2,570 (US$715) per month in Q2 2017
  • In Gush Dan, the average rent increased 1.5% y-o-y to ILS3,877 (US$1,079) per month in Q2 2017
  • In the Center and Jerusalem Periphery Towns, the average rent increased 1.6% y-o-y to ILS3,690 (US$1,027) per month over the same period
  • In the Southern district, the average rent rose by 2.7% to ILS2,730 (US$759) in Q2 2017 from a year earlier
  • In Sharon, the average rent increased 1.1% y-o-y to ILS4,444 (US$1,236) in Q2 2017
  • In the Northern district, the average rent rose by 1.3% y-o-y to ILS2,541 (US$707)
  • In Qrayot Haifa, the average rent rose slightly by 0.3% y-o-y to ILS2,404 (US$669) in Q2 2017

Over the past two decades the country’s homeownership rate has been gradually declining, and more households are renting, due to the shortage of affordable housing. Currently, the homeownership rate stood at 67.6%, down from 68.8% in 2008 and 73% in 1995.

Modest economic growth; very low unemployment

Israel gdp inflation

The Israeli economy expanded by 4% in 2016, after annual growth rates of 2.5% in 2015, 3.2% in 2014, 4.4% in 2013, 2.4% in 2012, and 5.1% in 2011, according to the IMF.

In the second quarter of 2017, Israel’s economy grew by a seasonally-adjusted annualized rate of 2.7%, an acceleration from a meager 0.6% growth in Q1 2017, mainly due to gains in consumer spending and fixed investment, according to the CBS.

In Q2 2017:

  • Private consumption increased 4.7%
  • Gross fixed capital formation rose by 5.2%
  • Exports of goods and services fell by 8.8%
  • Imports of goods and services fell by 1.1%

The economy is forecast to expand by around 3.4% this year and by another 3.3% in 2018, according to the BOI.

Israel’s unemployment rate fell to a record low of 4.1% in July 2017, according to the CBS. The country’s unemployment rate has been generally declining since 2003.

Israel unemployment

“We have a strong economy with low unemployment, but we are still fighting to push the figure below 4%, even though 4% is an amazing figure that we haven’t seen in decades,” said Finance Minister Moshe Kahlon.

The participation rate in the labour force among people aged 25-64 rose to 80.1% in July 2017, from 79.8% in the previous month. There were about 3.836 million employed and around 164,000 unemployed during the period.

Wages are also rising. In May 2017, the average monthly wage in Israel stood at ILS9,828 (US$2,734), up by 4.1% from a year earlier, according to the CBS.

Inflation was -0.7% in July 2017, from -0.2% in June, 0.8% in May, 0.7% in April, and 0.9% in March, according to the CBS. Inflation stood at -0.5% in 2016, from -0.6% in 2015, 0.5% in 2014, 1.5% in 2013, 1.7% in 2012, and 3.5% in 2011, based on figures from the IMF.

In 2016, the country recorded a budget deficit of ILS25 billion (US$6.96 billion), representing just 2.1% of GDP – the smallest deficit since 2008, according to the Finance Ministry. The country is expected to post a budget shortfall of 2.5% of GDP this year and 2.8% of GDP in 2018.

Israel’s public debt was equivalent to 62.3% of GDP in 2016, down from 64.1% in 2015, 66.1% in 2014, and 67.1% in 2013, according to the BOI. The country’s public debt has been falling since 2009.

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