In Israel, real estate has long been a pillar of the country’s economy: high demand coupled with low supply. In recent months, however, the sector has seen a number of challenges occur, causing the way business is run to change. From regulatory changes, to rising interest rates, to shifts in global investment trends, developers, investors and homebuyers alike are in face of a new reality. Market is still robust in a number of places, but there is a growing feeling that the fast price increament and easy financing days may be ending.
There is currently no factor more powerful in shaping the Israeli real estate market than the government’s persistent struggle for addressing housing affordability. In the past decade, Israel’s housing prices have skyrocketed thanks to population growth, relatively scarce land and growing demand from domestic and foreign buyers. The government has also launched several kinds of regulatory measures to cool the market and make homeownership more affordable. Specific measures include tighter lending standards, higher investment property taxes and incentives for building affordable housing.
These policies have had mixed effect. On the one hand, prices have been slowing down at a noticeable rate especially in expensive areas like Tel Aviv and Jerusalem. However, regulatory changes have made it so some investors find it harder to get financing, forcing a shift in the kinds of properties developed and sold. More affordable housing projects are pitting themselves against luxury real estate properties — which have held a monopoly in the Israeli real estate market for decades. But as the landscape shifts, it’s opening up new niches for developers who’ll embrace a change in tune.
The Israeli real estate market is also being shaped today by interest rates. With central banks everywhere hiking interest rates to fight inflation, the cost of borrowing has gone up for developers and homebuyers alike. In Israel this has cooled the market, as fewer buyers can secure mortgages and speculative investments are coming off. A strong demand for housing, especially in urban centres, means that buyers are having to sit back and take a second look at what’s on offer, as the cost of financing forces them to move down the cost scale by choosing smaller or cheaper properties.
However, the Israeli market is also experiencing an impact at the same time from global investment trends. A new wave of regulatory changes and economic conditions means foreign investors, a more traditional force in the Israeli real estate sector, are now building up a head of steam, making way for new players and creating some real estate shifts of their own. The depreciation of major currencies in relation to the Israeli shekel has made property purchases more expensive for the international buyers. Such has been the decline in foreign investment in some segments of the market, in particular in high end residential properties.
Despite this, there are factors that help support the strength of the Israeli real estate market. The country’s robust economy, too, is one of the key drivers, having weathered the uncertainty of the wider world. The tech sector, one of Israel’s main gross contribution to the Israeli economy continues to thrive, and unemployment remains low. It has allowed housing demand to sustain, especially in areas where there is heavy concentration of tech companies and its professionals.
Also, Israel’s population increases steadily, which fuels further demand in housing. The country is relatively small and has little land, so supply continues to be constrained, especially in the more desirable urban areas. As a result, demand changes without changing the overall market, which is still tight, but providing relatively limited opportunities for significant price drops. The Israeli real estate market remains attractive for investors contemplating a long term perspective, especially in places that have not matured, and in areas which are undergoing redevelopment.
And things ahead for the Israeli real estate market don’t look set to change that. However, regulatory changes and rising interest rates are giving temporary headwinds but the basic feature of market is still strong. In the development of new realities in the market; there is potential for innovative and for the growth of various areas such as affordable housing and sustainable development which is important in the current market.
