Israel’s economy has been dealt a huge blow in recent months and currently with no clear indication of how or when current hostilities will come to a close, it can be challenging to see green shoots or positive signs. Yet despite the tragic events, there are optimistic indicators for the future of Israel’s real estate sector.
Having been part of Israel’s real estate sector for 16 years, my perspective is shaped by both the trials and the resilience of the market. The recent period has been tough, with the economy overall slowing down and real estate has not been immune to this.
Yet already overseas interest is starting to turn back towards Israel. Whether it is the feeling of solidarity towards Israel, or fears of antisemitism which have been stoked up by the conflict in many quarters, the eyes of Jewish communities around the world are firmly focussed on Israel and herein lies the impact.
The reality on the ground is that Israel did not have sufficient supply of homes to fulfil demand pre- the current conflict, with every indication now being that the situation will in fact intensify competition and demand across all price points.
Regulation and bureaucracy have long limited the amount and rate of new building; high interest rates have increased financing costs, for developers and home buyers; and the likely shortfall in labour in the construction sector post-hostilities will also act as a brake on building.
For some time now, buyers have been delaying purchases, believing that Israel’s housing market has been experiencing hyper-inflation, and a price correction (down) was just around the corner, as has happened in other premium-priced locations. But it is difficult to believe that is going to happen here – mainly because there are very few people who match the criteria for being “financially distressed”, a key indicator of a potential housing crash. We also live in a small country where the population, in my lifetime, has grown from 4 to almost 10 million ,a significant portion of which are in a small part of the country, which is densely populated.
Israel’s conservative home-financing framework means that anybody who bought in the mid-2010s will only have received a mortgage for 70% of the cost of their home (Israeli citizens), or 50% if they were international buyers. Almost 10 years later, the value of their property has gone up by 30 to 50%, wherever in Israel they bought, and sometimes more. This conservative lending approach has paid dividends for those able to get on the ladder and has resulted in a small fraction of forced sellers, where being compelled to sell is often not directly connected to any real estate market reason. People won’t sell unless they absolutely have to and new product is very limited.
In January 2023, 2,574 new apartments were sold, down 42% from January 2022, and similar to the figure for January 2018. This January (2024) it is likely to be even lower. The new housing market is sinking into stagnation, with the number of new apartments sold over the last four months between 40% and 64% lower than the corresponding months in 2021 and 2022. This stagnation on the sale side will not last in definitely, yet few developments will start in the current environment.
Many of the buildings under construction in the major cities in Israel are already sold, having been purchased off-plan. With new building projects not being approved, demand will outstrip supply until the supply chain is rebuilt/re-started and is sufficient to meet domestic Israeli demand, let alone any increase driven by overseas interest.
Even the most pessimistic analysis of potential ‘Aliyah’ numbers and those who may buy second homes, suggests Israel’s property development market needs a significant uptick to even meet domestic demand, let alone latent demand from the current situation. All of which sets the stage for increasing lack of supply.
October 7th exposed many things about Israel, but among them it reminded world Jewry of what Israel means to them. Ultimately that will play well for Israel and for real estate asset values.
Nothing in life is without risk and many geo-political factors can upset the best theories and analysis, yet it seems that the resilience of the Israeli state and its people will be matched by the strength of its real estate, as an investable asset class.