Israel’s real estate market in 2023 was in a deep recession and faced major concerns that the recession could continue throughout 2024. The number of deals in the first nine months of 2023 totaled 58,000, down 36% from the corresponding period of 2022 and down 46% from the same period in 2021, which was a record year for Israeli real estate.
The pandemic and the lockdowns had a significant effect on the housing market, as many people postponed their plans to buy or sell homes. The uncertainty and the economic slowdown also reduced the demand for housing, especially among young couples and immigrants. Moreover, the supply of new homes was also affected by the delays in construction and the shortage of workers and materials.
The Bank of Israel responded to the inflationary pressures by raising the interest rate several times in 2023, reaching 2.5% by the end of the year. This made mortgages more expensive and less accessible for many potential buyers, especially those with low incomes or high debt levels. The higher interest rates also reduced the profitability of holding housing as an investment, as the rental yields did not keep up with the rising costs.
The divergence between the high-end and the low-end segments
While the overall housing market was in a slump, there was a noticeable divergence between the high-end and the low-end segments. The high-end segment, which includes apartments worth more than NIS 10 million, saw a sharp decline in the number of transactions and prices in 2023, compared to the previous years. According to the Israel Tax Authority, there were 224 homes bought for more than NIS 10 million in 2023, less than half the number in 2021. The average price per square meter in Tel Aviv, the most expensive city in Israel, dropped from NIS 70,000 in 2021 to NIS 55,000 in 2023.
The reasons for the slowdown in the high-end segment include the following:
- The deterioration of the economic situation and the uncertainty about the future, which reduced the confidence and the purchasing power of the wealthy buyers, especially those in the tech sector.
- The increase in the supply of luxury apartments, which created a surplus and a downward pressure on prices. Many of these apartments were built in anticipation of the demand from foreign buyers, especially Jews from the US and Europe, who were expected to immigrate to Israel after the pandemic. However, this demand did not materialize as expected, due to the travel restrictions and the political instability in Israel.
- The tightening of the tax policy and the enforcement of the anti-money laundering regulations, which made it more difficult and costly for the buyers to evade taxes or to use illicit funds to buy properties.
On the other hand, the low-end segment, which includes apartments worth less than NIS 1.5 million, saw a slight increase in the number of transactions and prices in 2023, compared to the previous years. According to the Central Bureau of Statistics, there were 18,000 homes bought for less than NIS 1.5 million in 2023, up 10% from 2021. The average price per square meter in peripheral areas, such as the Negev and the Galilee, rose from NIS 7,000 in 2021 to NIS 8,500 in 2023.
The reasons for the resilience of the low-end segment include the following:
- The persistence of the housing shortage and the affordability gap, which increased the demand for cheap and small apartments, especially among young couples, students, and single-parent families.
- The availability of government subsidies and incentives, such as the buyer’s price program, the rent assistance program, and the public housing program, which helped the low-income buyers to access the housing market.
- The improvement of the infrastructure and the quality of life in the peripheral areas, which made them more attractive and accessible for the buyers who were looking for affordable and spacious homes.
The outlook for 2024 and beyond
The housing market in Israel is expected to face more challenges and uncertainties in 2024 and beyond, as the economy and the society recover from the pandemic and the political turmoil. The main factors that will affect the market are the following:
- The monetary policy and the inflation rate: The Bank of Israel is expected to continue to raise the interest rate in 2024, in order to curb the inflation and to stabilize the exchange rate. The inflation rate, which reached 6.5% in 2023, is expected to moderate to 4% in 2024, but still remain above the target range of 1%-3%. The higher interest rates and the lower inflation will reduce the demand for housing as an investment and a hedge against inflation, and will increase the burden of the mortgage payments for the borrowers.
- The fiscal policy and the budget deficit: The government is expected to adopt a more restrictive fiscal policy in 2024, in order to reduce the budget deficit and the public debt, which reached 90% of GDP in 2023. The fiscal consolidation will involve spending cuts and tax hikes, which will affect the disposable income and the consumption of the households, and will reduce the public investment and the subsidies for the housing sector.
- The supply and the demand of new homes: The supply of new homes is expected to increase in 2024, as the construction activity resumes and the projects that were delayed or frozen during the pandemic are completed. The demand for new homes is expected to remain weak, as the buyers are deterred by the high prices and the high interest rates, and as the immigration and the natural growth of the population slow down. The mismatch between the supply and the demand will create a downward pressure on the prices and the profitability of the housing sector.
- The social and the environmental issues: The housing market in Israel is expected to face more social and environmental challenges in 2024 and beyond, as the public awareness and the activism increase. The main issues include the following:
- The housing affordability and the inequality: The housing market in Israel is one of the most expensive and unequal in the world, as the prices have risen much faster than the incomes and the rents, and as the gaps between the center and the periphery, and between the rich and the poor, have widened. The housing affordability and the inequality have become a major source of social discontent and political mobilization, as seen in the protests and the elections in recent years. The government and the civil society will have to find ways to address these issues, by increasing the supply of affordable and public housing, by regulating the rental market, by redistributing the income and the wealth, and by promoting the social and the spatial integration.
- The urban planning and the sustainability: The housing market in Israel is one of the most crowded and unsustainable in the world, as the population density and the urbanization rate are among the highest, and as the environmental quality and the resilience are among the lowest. The urban planning and the sustainability have become a major concern and a priority, as the climate change and the natural disasters pose more risks and threats. The government and the civil society will have to find ways to improve these aspects, by optimizing the land use and the density, by preserving the open spaces and the biodiversity, by enhancing the public transportation and the mobility, and by adopting the green and the smart technologies.