Housing prices in Israel rise as mortgage borrowing slows

Bank borrowing has fallen back as interest rates rise, but the market trends remain unclear to experts

A view of the upscale Mamila neighborhood in Jerusalem, on October 27, 2015. Most of the luxury apartments are owned by foreign residents or by Israelis who use them as vacation homes. (Lior Mizrahi/Flash90)
A view of the upscale Mamila neighborhood in Jerusalem, on October 27, 2015. (Lior Mizrahi/Flash90)

Data published this week by the Bank of Israel shows monthly mortgage borrowing fell in Israel to about NIS 10.5 billion ($3.13 billion) in April, down 22% from March levels of NIS 13.4 billion ($3.99 billion).

This decrease aligns with the April increase in interest rates which rose for the first time since 2018, from 0.1% to 0.35%, or, in terms of the prime interest rate, from 1.5% to 1.85%.

The interest rate increase came after a year of record mortgage borrowing: NIS 130.5 billion total ($38.9 billion) in the last 12 months, or a monthly average of NIS 10.88 billion ($3.24 billion) although there is considerable variation from month to month.

At least until March, housing prices across Israel continued to rise, up more than 16% year on year and 2% between February and March, the steepest rises in a decade, according to figures provided by the Central Bureau of Statistics (CBS), also this week.

CBS reported double-digit growth rates in all districts — 18.5% in the center, 13.8% in the north, and 12.3% in the south. In Jerusalem, prices rose by 16.7%, in Tel Aviv 16%, and in Haifa 14.9%.

Inflation, up to 4% in Israel, has been pushing up averages so that year-on-year the average price for an Israeli home according to CBS has gone up from NIS 1,704,900 ($508,040) to NIS 1,756,800 ($523,506) in the first quarter of this year. This in turn has pushed up minimum down payments (25% of the property value) to NIS 439,200 compared to NIS 426,225 last year. In addition to the down payment, would-be buyers also need to pay all purchase fees, often a percentage of the final price.

Bank of Israel Governor Amir Yaron speaks during a press conference in Jerusalem on April 11, 2022. (Flash90)

With average prices in Tel Aviv (NIS 3,596,300), Kfar Saba (NIS 2,718,300), Ramat Gan (NIS 2,530,300), Jerusalem (NIS 2,326,800) and Rishon Lezion (NIS 2,277,600) climbing, the costs of getting on the property ladder are rising rapidly. This should push up mortgage borrowing. A fall, even a relative one, may suggest that not as many homes are being traded, or that those buying are going for cheaper properties.

The data itself is also not entirely clear. The figures for house prices relate to March. The figures for mortgage borrowing relate to April. That was also this year the month in which Passover fell, which means working days and market activity were potentially reduced.

But other analysis from the Finance Ministry and the Central Bureau of Statistics paints a picture of a market which is delivering some but not all that the government might hope for. Sales of new properties seem to be slowing, investor activity has reduced every month since November, and first-time buyers (potentially buying cheaper properties) are constituting a larger share of the market.

The government is working to increase new homes coming on to the market and streamline building approval processes. But this takes time to impact the sales market. In March, 12,600 apartments were purchased, a decrease of 5% on March 2021. This suggests either that people are being priced out of the market, or that less stock is coming into the market.

The government would like to see greater balance in supply and demand for housing around the country. But a quarter of all new apartments sold in the first quarter of 2022 were concentrated in four cities – Tel Aviv-Yafo, Rishon Lezion, Jerusalem, and Ashkelon.

A construction site in the central Israeli city of Be’er Ya’akov where new housing is being built, February 22, 2022. (Yossi Aloni/Flash90

Fewer new homes are being sold but that may be because they are not coming on to the market, because they are priced too highly, or because they are in areas where demand is limited. Statistics show an 8.1% drop in demand compared to the previous quarter (October to December 2021). Seasonally adjusted numbers still show a fall of 2.6%.

The government looking to reduce purchases by so-called “investors” (buyers who already own a dwelling), has reimposed a higher property tax, from 5% to 8%, for households buying second or third homes starting the end of November 2021. In March, investors bought 2,000 apartments, a decrease of 21% compared to the previous year.

Real estate agents working in Israel’s most in-demand investor market, Tel Aviv, however, have suggested to The Times of Israel that there is no material fall in investor interest in property – merely a scarcity of available stock. And there was a rush to close investor sales before the tax hike at the end of November, which may still be impacting on levels of new sales month by month.

First-time purchases are rising, according to the Finance Ministry, to the highest levels for young couples in ten years. They accounted for 5,200 homes in the free market in March, an increase of 25% compared to March 2021. More peripheral (and cheaper) areas dominated these purchases — the lowest average property prices are currently in Beersheba (NIS 1,059,000), Haifa (NIS 1,222,800) and Ashkelon (NIS 1,380,200). This shift in market activity could help explain a fall in mortgage borrowing.

But the experts are skeptical that we are seeing a meaningful shift in the market in the way the government would hope for — a move away from extreme price rises toward greater access to homeownership for a much wider group of people.

Aaron Krasner, the Jerusalem-based head of Anglo Mortgages, predicted that price rises will slow but the market fundamentals will remain the same.

“The population continues to grow faster than the housing supply. The government has the same policies that have been in place for over a decade,” he told The Times of Israel. “First-time buyers are becoming more and more reliant on the previous generation for a down payment, and need even higher salaries to service an ever-growing mortgage. But this doesn’t dampen their desire to own their own home — and it’s hard to see that basic human need for security and making a home diminishing.”

Daniel Goldstein, who heads up Tel Aviv Real Estate Agency Beauchamp Estates, warned against making judgments based on one month’s numbers. “I think that we still see strong demand. There are a few challenges in the market, and difficulties in bringing money in from abroad,” he said. “But I see prices continuing to be strong, just maybe not climbing like they have in the last few years.”

As interest rates and inflation rise, people may be rushing to buy, said Norman Shapiro, senior broker at First Israel Mortgages. “I would not be surprised if we see increased mortgage funding… buyers are rushing to lock in rates,” he said.

The inflation rate for the last 12 months in Israel is now at 4% — a record since 2011, but lower than many other developed countries.

The consumer price index, too, rose by 0.8% in April 2022, in line with earlier forecasts, but in part affected by seasonality.

Meanwhile, Finance Minister Avigdor Liberman has already promised a new and “dramatic” plan for the housing market.

It suggests a recognition that despite government interventions to date, including the introduction of “Target Price” (Mehir Matara) lotteries, further action is needed to deliver any material change.

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