Explaining Israel’s housing market paradox

The least significant element in the CBS housing price figures is the annual rise between July-August 2023 and July-August 2024, the most recent period for which data is available. In that year, housing prices rose by 5.8%. But the Israeli real estate market after November of last year is not the same as it was before then. The relevant data for the current market is that after eight consecutive monthly increases in the housing price index, it rose by 7%, representing an annual increase of 11%, with more to come.

If we correlate the price data with the number of transactions in July and the numbers for mortgages in July and August, we can see that we are promised a continuation of the strange movie in which the Israeli real estate market stars: prices rise at the same time as the supply of homes grows. To put it in numbers: The Central Bureau of Statistics puts the number of unsold new housing units at the end of July at 69,430, up 19% from the end of July 2023, up 47% from the end of July 2022, and up 53% from three years ago. Not since at least the 1990s has Israel known such a large supply of unsold new homes. And yet prices are accelerating uncontrollably.

We at Globes believe that this paradoxical phenomenon does not result from a collapse in the effect of supply and demand on prices, but rather from large gaps between the supply of homes on paper and the supply of homes actually required.

Most new homes are not of interest to buyers.

The housing supply on paper includes all new unsold housing and all second-hand housing for sale, totaling about 100,000 housing units, but the public chooses from among these housing units the housing that suits them. In the case of new housing, people look primarily for housing that will be completed soon, and in the case of second-hand housing, those with areas protected from air raids. When potential buyers exclude housing that does not suit them, they take into account housing on the plan, which, with all the problems of today’s work, has unpredictable completion dates, and housing that does not have protected areas, i.e. most of the second-hand housing in Israel.

The long-term failures of Israeli governments, which did not accelerate urban renewal programs and the promotion and expansion of the Tama 38 project, and the short-term failures of the current government, which caused a sharp decline in the construction workforce, have led to a situation where, despite the large supply numbers, there is a shortage of homes.

The market’s hunger for homes that people actually want to buy is most clearly expressed in the proportion of new homes sold. In the first seven months of this year, these homes accounted for 47% of all transactions on the market. The second-hand market, which is largely based on older apartments with no protected space, is stagnant.

This is especially true in Tel Aviv, where the average number of new homes sold per month has tripled in seven months. Two-thirds of homebuyers in Tel Aviv buy new homes. In Ramat Gan, the figure is 52%, while in Petah Tikva, purchases are evenly split between new homes and second-hand homes. In the southern cities of Ofakim, Netivot and Sderot, where the shock of homes without a secure space is particularly strong, there is practically no market for second-hand homes, while these cities are at the top of the charts for new home purchases.

The geographic areas driving up the housing price index are Haifa, where prices have risen by 9.7% since November, the Central District, where prices have risen by 7.8%, and Tel Aviv, where prices have risen by 7.2%. This is followed by the Northern District, up 6.8%, the Southern District, up 4.4%, and the Jerusalem District, up 2.9%.

New home prices rose by only 3% during this period, suggesting that price increases are mainly concentrated in the second-hand sector, reinforcing the hypothesis that second-hand homes with protected space are in short supply, and that those with it are becoming more expensive quickly.

Rents are also rising, albeit at a moderate pace. The rent index rose 0.7% in August and has risen 3.5% since November. In the first months of the war and through the winter, rent increases slowed significantly, with some dips here and there, but they have regained momentum over the three months of the summer.

This article was published in Globes, Israeli Business News – en.globes.co.il – on September 16, 2024.

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