Housing Ministry plans to encourage long-term rentals as Israelis priced out of purchasing
With more Israelis renting instead of buying homes, the Construction and Housing Ministry is working on a strategic plan to make the market serve all citizens, not only investors
Zev Stub is the Times of Israel's Diaspora Affairs correspondent.
It is a well-known secret that the market for apartment rentals in Israel is a chaotic, disorganized jungle with astronomical prices and little regulation. Renters have no shortage of stories about the challenges of finding a decent apartment or of landlords asking for odd or unreasonable contract terms or failing to provide basic home maintenance.
With 29 percent of Israelis renting, a figure that is expected to rise in the coming years, the Construction and Housing Ministry tasked Director General Yehuda Morgenstern with formulating a strategic plan to make the long-term rental market work better. The plan was expected at the end of 2024, but the job has proven more complex than expected, and two months later, there is still no target date for its publication, a Housing Ministry spokesperson said.
Whenever it is delivered, the plan is unlikely to include any of the ambitious legislative changes or far-reaching targets that have been features of various housing reforms announced over the years.
Instead, the ministry hopes to make order in some key areas of the long-term rental market and recalibrate the industry’s trajectory for the future. Here’s a look at some of the things likely to appear in the strategic plan.
Institutional rentals
When talking about long-term housing solutions, you have to differentiate between two types of markets — institutional government rentals and the private market, noted Camila Meyer Weissberg, a Hebrew University Ph.D. student who is writing her dissertation on Israel’s long-term rental housing policy.
The vast majority of Israeli tenants rent their homes privately from individuals who own them. This is different from what occurs in most Western countries, where apartment complexes are often designed exclusively for renters and managed by companies that offer standardized contracts and transparent rules about price increases.
In 2013, Finance Minister Yair Lapid, new to the Knesset after his Yesh Atid party’s stunning election performance, put forward a plan to create long-term rental complexes where residential units would be rented for five to 10 years at a time. The plan envisioned the development of as many as 150,000 units where renters would pay below-market prices for homes.
However, the reality that emerged has been different. Only about 18,000 units have actually been built to date, serving less than 1% of the rental market. The problem is that the model isn’t worthwhile economically for developers.
“These projects take a lot of capital to develop, they deliver poor annual returns, and you have to wait 20 years or more before you can sell it,” Meyer Weissberg explained. “It’s not a worthwhile investment for contractors or the banks.”
Part of the challenge is the low cost of renting in Israel in relation to the purchase value of a property compared to other countries. While income from a rental complex in Europe or the US typically delivers annual returns of 6-7% on the initial investment, this type of project in Israel might return only about 2%. It also means that even if such a project could be viable when interest rates were nearly zero several years ago, it doesn’t work in an era of high interest rates.
Another issue is that the program was conceived as a solution to the cost-of-living crisis dominating Israel’s public debate at the time, Meyer Weissberg explained,
“The idea was to offer housing at 20% or so below market value to the middle class, which was struggling with rising home prices.” Meyer Weissberg said. “By creating a new supply of discounted housing options, there was hope it could help reduce prices throughout the entire market.”
Because so few projects were developed, however, that plan failed to materialize, and only a small number of households chosen by lottery to live in these projects benefit from the program, she noted.
Despite the challenges, the Construction and Housing Ministry is committed to finding ways to make the system work, including bringing into the market large investment funds that can afford to wait decades to see their returns on investment.
“Even though these housing projects are moving slower than planned, there is a general understanding that we don’t have a choice,” Meyer Weissberg said. “As more people move to renting and prices continue to rise, even policy-makers and municipalities that were skeptical 10 years ago are now interested. The need is clear, and the government wants to make it work.”
Private renters
The vast majority of renters in Israel have one-year contracts with a private landlord, often an individual who bought the property as an investment or for future use. For many, problems can start there.
One of the spurs of Israel’s massive price-of-living protests in 2011 was when then-25-year-old video editor Daphne Leef was evicted from her apartment for building renovations. When the renovations were complete, the landlord told her she couldn’t move back in because his son wanted to live there. When she couldn’t find affordable housing, she took to the streets.
That type of short-term planning by owners is typical in Israel, said Nachi Paris, a Jerusalem-based real estate agent.
“Unlike in the US, it is very rare to see a landlord here offer a rental contract for three to five years,” Paris said. “Because selling can be so lucrative, even long-term owners don’t want to lock themselves into long-term commitments where they will be unable to sell at a high price. So contracts are typically one to two years maximum.”
The Construction and Housing Ministry is said to be formulating a plan to encourage owners to offer longer-term contracts, likely with tax incentives. However, it is not yet clear how it will do so.
“Tax incentives are not always successful, and it is not clear what types of incentives would work in this case,” said Oriya Shohat, a Jerusalem-based attorney specializing in real estate law. “Often, attempts to try to intervene in the real estate market end up making things worse. The best tool the government has to influence the real estate market is to tweak the supply and demand.”
Meanwhile, Israel’s laws regulating the rental market are among the most lax in the Western world, with minimal laws regulating pricing or other terms in a rental contract.
“In many countries, a rental agreement is required to have certain terms, and needs notarized in order to be recognized,” said Meyer Weissberg. “Here, you can put almost anything you want in the contract.”
The 2017 Fair Rental Law sought to establish a baseline to define minimal requirements for livable apartments and fair terms in a rental contract. However, the experiences of many renters attest to the fact that these standards are not always followed.
While many cities in Israel offer rental contract templates to landlords, the plan is expected to recommend improvements.
Collecting more accurate data about the rental market is another target of the ministry’s plan. Rental information published by the Central Bureau of Statistics is generally seen as inaccurate, as many landlords do not or are not required to report their earnings. Many now look to sites like Madlan or WeCheck for real-time market information. The ministry requires a plan to gather higher-quality information to guide renters and its own policy-making.
Aware of the challenges, the Construction and Housing Ministry hopes to deliver a realistic and nuanced framework to straighten out the rental market in the near future.
“People want stability and long-term living security, regardless of whether they rent from a company or an individual,” Morgenstern told a real estate industry conference last month. “We just have to identify what works.”
The Times of Israel Community.