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Analysis

Vowing to lower prices, new government could target Israel’s untamed rental market

Renting a home in Israel can be a painful experience, and with rising housing costs putting ownership out of reach for many, officials will need to provide solutions

Israelis protest against soaring housing prices and the cost of living, in Tel Aviv, on July 2, 2022. (Tomer Neuberg/Flash90)
Israelis protest against soaring housing prices and the cost of living, in Tel Aviv, on July 2, 2022. (Tomer Neuberg/Flash90)

Renting a home in Israel can be a painful experience. There is no standard lease agreement and owners can demand all kinds of (reasonable and unreasonable) guarantees, depending on the property and their temperament. Leases are also short-term, usually for just one year (with options to extend for another year), and tenants can find themselves out of a home they intended to be in for a longer term with just a few months’ notice. A leaky bathroom can turn into a battle of wills between a tenant and an owner in the absence of clear clauses indicating who is responsible for which repairs.

It is an unregulated market that largely favors private owners (potentially as many as 13% of Israelis) who can theoretically increase the rent by any percentage, and evict even good tenants to secure these higher rents. This is due to an overheated housing market where demand far outweighs supply and many are priced out of an ownership track.

About 30% of households (or roughly 800,000 households of some 2.7 million in 2021) live in rented housing (excluding very short-term rentals like “zimmers” and vacation homes), according to a 2018-2019 survey conducted by the Central Bureau of Statistics and released in 2021. The percentage of those who do not own their own home has been relatively stable over the last few years, according to market research from Bank Leumi, but there is potential for it to rise as being able to afford to buy a home becomes ever more difficult.

Yet the rental market has almost nothing by way of a framework that effectively protects the interests of both sides.

For a brief moment, there were hopes for the Fair Rental Law which the Knesset passed in 2017. It was driven initially by former Labor MK Stav Shaffir, who in 2011 helped lead the sweeping summer protests over housing and cost of living, also known as the social justice protests.

The law did not intervene in the market but hoped to provide balance and fair conditions for tenants. It does not apply to all rentals, and enforcement has been very limited. ּBased on details regularly shared on a Facebook site dedicated to exposing bad practices in the Tel Aviv rental market, even the idea of a basic minimum state for property rented out (ventilation, division between living/sleeping area and bathroom) is far from universal, and the struggle to find a decent place to live at a realistic rent is an everyday reality as The Times of Israel has previously reported.

Israelis protest against the soaring housing prices in Tel Aviv and the cost of living, on July 2, 2022. Photo by Tomer Neuberg/Flash90

The renting experience of Vered (her name has been changed at the request of the young woman involved), is not an isolated one. She needed to move in May this year, and began looking for a new apartment in the Katamonim, her area of choice in Jerusalem. She responded to an advert by a landlord, saw the apartment, and liked it.

Then came the shock: the landlord told her that in addition to the three months deposit required (a substantial sum but one she had put aside and was prepared for), he also expected her to meet the costs of the agent that he had employed — a further bill for a month’s rent at NIS 4,500. Standard practice is that the landlord pays for the real estate agent’s service, as he hired him/her. So Vered objected: she said that she had not hired the agent, he had done nothing for her in relation to the rental, and that as his relationship was with the landlord she felt that he should pay. The landlord refused to accept her position. The contract was canceled. Eight out of the 10 other properties she found wanted similar additional fees. She rented one of the two that did not involve an agent.

Although she eventually found a place to live, for Vered this was a prime example of how “a landlord can behave with absolute impunity and the tenant is put in a position whereby they must either pay up or walk away from a place they want to live,” she said.

Talking to real estate agents, real estate lawyers, landlords and tenants, there is a consensus that the framework for renting in Israel needs to change. “It’s a jungle,” said one agent, “and it doesn’t need to be.”

Early in this most recent election campaign, some younger renters tried to pull people together to make their voices heard by politicians and to obtain commitments for a more affordable housing market. A few tents went up on Rothschild Boulevard in Tel Aviv. A social media campaign gathered tens of thousands of followers, but a gathering in Tel Aviv attracted only 2,500 people. In 2011, 400,000 people made it out to the streets at the height of the social justice movement, and even then the reforms delivered were minimal.

Thousands of Israelis march in the center of Tel Aviv on August 6, 2011, to demand ‘social justice’ and to pressure the government into reforms that would ease the costs of living. (Matanya Tausig/Flash90)

When politicians talk about housing, as they have done regularly through the period of the last government, their focus is on building new homes, many of them bought up by investors and subsequently rented out. Even within national housing programs which offer subsidized purchases (Mehir Lamishtaken and more recently Mehir Matara), it is estimated by the Housing Ministry that 36% of those who bought an apartment through one of the schemes rent it out (based on a survey of over 12,000 households).

Speaking to his supporters as election returns showed him likely victorious early Wednesday, Likud leader Benjamin Netanyahu twice mentioned bringing down the cost of living as one of his priorities. Tackling the rental market could be one way of doing so.

A need for long-term rentals

Since 2014, there has been a focus on incentivizing the inclusion of long-term rental apartments within new building projects. Just a few months ago a new framework was introduced to try to increase the number being delivered within new build projects. This includes major tax breaks for developers, and for potential tenants, leases that offer up to 15 years of continuity in an apartment. Recently announced building plans in Ramle, Beer Yaakov, Ashdod, Ramat Gan, and Jerusalem, and proposed development in Kiryat Gat are all seeking to incorporate non-standard homes into the projects that are getting approved.

Although there is a cultural premium on trying to own a property for citizens in Israel (and 60 to 70% of people do own a home), high levels of homeownership are not typical of all developed economies (figures from 2021). In Germany, 54.3% of homes are rented and rent is not allowed to rise by more than 15% over a three-year period. In Denmark, 34.4% of homes are rented and in Austria, that figure is 30.2%.

Both also have a tight framework for balancing tenant and landlord interests, which Israel lacks.

A majority of landlords in Israel are private individuals and their terms can vary wildly. One basic demand is a rental deposit, which goes into the landlord’s private account and can be difficult to get back. Sometimes there are demands for guarantors or copies of salary slips. Generally, there can be a lack of clarity over who is responsible for what if something breaks down or needs fixing and most people don’t seek out a legal review of rental contracts. Most pertinent, there is little certainty for tenants year-to-year around rent levels or continuity, which leads to housing instability — a particularly important factor for renters who are less mobile such as older couples or those with young children.

The Times of Israel has spoken to real estate professionals across housing markets in Israel. There is agreement that the framework for the rental market needs to change — whether the rental rate is NIS 2,000 or NIS 70,000 a month:

  • “The use of a standard contract needs to be enforced,” says Advocate Ohad Shpak. Like many other lawyers working in the real estate space, he has a template contract that balances the rights and responsibilities on both sides. The City of Tel Aviv — the rental capital of the country — also offers a fair rental contract which can be accessed from the municipality website. But many landlords prefer to use their own contract, with clauses supporting their interests, and potential tenants don’t have the knowledge or the power to insist otherwise.
  • Agents such as Daniel Goldstein, who operates across Tel Aviv, believe that without excessively intruding into the free market, there is potential for rental agreements to include some form of managed rental increases. This could provide a link to inflation or the cost price index for multi-year tenancies, giving security to landlords and tenants that rents can move upwards, but in a managed framework.
  • Goldstein feels very strongly — as does Shpak — that “the three-month deposit paid by the tenant at the start of a tenancy should be placed in a trust or escrow account. This would keep it safe, for tenant and landlord, for the duration of the tenancy, and could ensure that it is dealt with properly at the end of a tenancy.” At the moment, many tenants go through an extended fight to recover any of their deposit, in part because the landlord has already considered it income and used it up.
  • “A proper inventory,” said Goldstein, “with pictures, should be taken and shared with both sides at the start of a tenancy — so that there is proof of the state of the premises, and therefore on what needs dealing with when the tenancy comes to an end.”
  • Income from renting out property should be taxed from the first penny earned, said Shpak. This is the case with regular income, but in the rental market, the first NIS 62,300 earned each year is tax-free. In his many years of experience, he has seen landlords work to maintain rent below this threshold, by asking renters for lump sums in advance to cover costs that should form part of monthly rent.
  • With so many private landlords renting out just one or two properties, the market is messy and amateurish, with vast differences in behavior, the agents noted. In more developed rental markets, property management is the norm — with companies operating on behalf of multiple landlords. Goldstein said that “introducing professional management will have a butterfly effect on the rest of the Tel Aviv market.”

These measures would not necessarily tackle rental inflation — which is rising, (according to the latest CBS numbers), at 8% a month for new tenancies.

The falls that have been seen in the value of mortgages already indicate that there are fewer buyers. The rising cost of living means less cash available to invest in property to rent out. The strong shekel affects purchases in dollars or pounds, increasing prices for international investors. These factors could mean fewer new rental properties coming onto the market.

But the constant rise in house prices also means that the number of people looking to rent will increase. And reshaping the rental market is long overdue.

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