Housing price falls in Israel set to gain momentum

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After rising for nine consecutive months, the Housing Price Index is again falling and additional data published last week suggests the trend will continue.

After nine consecutive months are rises in the Housing Price Index, prices fell in the latest index for August-September 2024, published by the Central Bureau of Statistics last week. Although the average price only fell 0.1%, combined with additional data published last week, estimates are that the real estate market is on its way back to the lows of 2023.

Moderation in price rises started about six months ago. In six of the last seven indices, average price rises were lower than in the preceding month. The exception was the June-July 2024 index, which was higher than May-June. So it is no surprise that this trend has continued and slipped into minus.

From a broader perspective, over the last ten months, the housing price index rose 6.8%, but two-thirds of the increase was recorded in the first five months and only one-third in the last five. This shows that the uptick has rapidly faded.

Prices jumped at the start of the war

There was a major jump in housing prices in the early months of the war - an event which would normally Have been expected to depress the market. Moreover, prices started rising at the start of the war after eight consecutive monthly declines in the housing price index in 2023. So what happened?

Estimates are that a major factor was that Israelis began actively looking for apartments with security rooms, which was reflected in increased purchases of new apartments and relatively new second-hand apartments as Israeli sought protected spaces in their homes. Second-hand apartments with security rooms recorded bigger price increases than new apartments.

However, ultimately the economy will have its say and the special circumstances of the war have more or less exhausted their effect on housing prices. High interest rates and price rises make it more and more difficult to buy apartments these days, and force buyers to take out expensive mortgages. Now buyers seek slightly cheaper homes, and driving harder bargains.

For example, the average price of a four-room apartment in Beersheva fell in the third quarter by about NIS 13,000 (to NIS 1.31 million) compared with the second quarter. A similar trend was also seen in Herzliya, Haifa and Rishon Lezion - where the average price dropped by nearly NIS 150,000, to NIS 2.46 million. In Tel Aviv, the average price of four-room homes rose in the third quarter by NIS 40,000 (to NIS 4.87 million), and increases were also recorded in Ramat Gan and Netanya.

the contractors' ceiling

The financing incentives and discounts offered by developers for homes under construction proved highly successful in terms of increasing sales, and breathed new life into a market that had sunk into slumber. But in recent months, contractors seem to have hit a ceiling they can't break through, and the market has stalled.

There is no accurate information about the 80/20 deals (80% loans 20% equity) offered by developers, since they were never documented in an orderly manner. The deals began at the end of 2022, new apartment sales fell to levels not seen sincxe 2018, while the supply of new apartments was 40% higher than in 2018. This caused developers and banks to look for ways to get rid of the large inventory. The deals not only postpone most of the payments for the apartments, but also include significant discounts.

The effect of these deals began to be felt in the second half of 2023. Within about a year, there was an increase of 65% in sales of new apartments (after deducting apartments sold in government subsidized programs. The number of these deals peaked in June 2024.

But there is a limit to what can be achieved in Israel's war-hit economy. After the housing prices rises since the start of 2024, it seems that the deals have reached a kind of ceiling and the market has stalled. During the third quarter, an average decrease of more than one percent per month was recorded in the sale of new apartments. When you deduct the apartments sold in government subsidized programs, the decrease is even greater.

In Ashkelon, for example, there has been a 23% fall in the number of new apartments purchased in the third quarter compared with the second quarter. In petah Tikva the decline was 22%, in Rishon Lezion 30%, in Ramat Gan 25% and in Beersheva 27%.

This looks like a trend with the Bank of Israel putting these deals under pressure and Bank Leumi - the first bank to allow developers to institute these deals - now restricting them. The Israel Tax Authority is also eyeing these deals and the possibility of imposing new taxes on them. All these developments do not bode well for the continued popularity of these deals.

The Jerusalem paradox

The district that leads these housing price declines is Jerusalem. In terms of real estate deals, about 70% of the deals in this district are in the city itself, and almost 30% in Beit Shemesh. In each of the months of the third quarter of the year, price decreases were recorded in the district, at a rate of 1.7%. On the other hand, in this district, the number of quarterly deals recorded was the highest in the last two years (more than 2,500 deals). Two apparently contradictory figures.

However, the prices of deals completed in the capital hints at what happened. The average price of deals in the third quarter of 2024 was 5% lower than the second quarter. The change in apartment prices depended on their size. four-room apartments fell 1.3% between the second and third quarters, while five-room apartments rose 3% (larger apartment prices fell 9%, but the sample was too small). Another notable thing in Jerusalem was buyers' preferences, which mainly included small apartments of up to 3 rooms. These recorded relative stability in the number of deals in the second and third quarters, while a large decrease was recorded in deals for bigger apartments.

Part of the reason for the price declines was the massive sale of apartments in subsidized programs in Ramot and Givat Hamatos, which cut average prices. Another factor was foreign residents, who buy in Jerusalem and Beit Shemesh in waves. Although their number is not high, communities often buy together, so the effect on prices may push upwards when they purchase - and downwards, in periods after the purchases.

However, in general, the picture that emerges from the numbers is that Jerusalem buyers in the third quarter looked for smaller apartments than those purchased in the second quarter, and were only willing to pay NIS 40,000 less on average than at the end of September.

Published by Globes, Israel business news - en.globes.co.il - on November 18, 2024.

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