Why Israel’s housing market is seeing an unlikely surge amid the war
Experts say a surprising spike in prices can be chalked up to systemic flaws, labor shortages and foreign buyers – but whatever the cause, Israeli buyers are feeling the squeeze
Amid Israel’s ongoing multi-front conflict, the local real estate market continues to defy expectations, with housing prices soaring to near-record highs even as the nation grapples with war. This paradox has raised questions: How can demand for housing remain robust in a country embroiled in such turmoil?
A combination of factors — including a long-standing housing shortage, strong population growth, and growing foreign investment — has kept demand high, even as the conflict disrupts construction and economic stability. While the market remains hot, it’s creating significant challenges for first-time buyers, who are increasingly priced out of central cities.
According to the most recent Alrov Housing Affordability Index, the second quarter of 2024 saw housing prices reach levels of unaffordability nearly on par with the peak recorded during the second quarter of 2023. The report, which measures housing affordability based on mortgage repayments and down payments required for entry into the market, highlights the growing challenge for many Israelis seeking home ownership.
Danny Ben-Shahar, co-author of the report and director of the Alrov Institute for Real Estate Research at Tel Aviv University’s Coller School of Management, explained that the sharp rise in prices began long before the war.
“Looking at the past decade, we see that prices began increasing around 2007, with a brief stabilization before 2020. Over the past two years, however, prices have surged again,” he told The Times of Israel.
The war — which began in October 2023 after thousands of Hamas terrorists invaded Israel, slaughtering 1,200 people and kidnapping 251 to the Gaza Strip — would lead one to expect a sharp downturn in the real estate market, yet demand remains unabated.
“What surprises me is that, despite the ongoing conflict, we continue to see strong demand. People are still investing in Israeli real estate,” Ben-Shahar said. Data from the Israel Central Bureau of Statistics corroborates the claim, revealing that prices have continued to rise by six to seven percent per year.
A complex web of economic forces
To understand this anomaly, experts point to a combination of macroeconomic factors that extend beyond the war. Nir Mualam, a professor of architecture and urban planning at Haifa’s Technion – Israel Institute of Technology, noted that even before the conflict, housing prices had risen dramatically due to systemic issues within the Israeli market.
“The key problem is a chronic shortage of housing units, which existed long before the war,” he said. “The Israeli planning system simply cannot produce enough housing to meet demand.”
Israel’s booming population, among the highest in the developed world, further fuels this demand. According to the Central Bureau of Statistics, Israel’s population grew by 1.6% in 2023 alone.
“With 2.6 million households in Israel, we need an additional 55,000-65,000 homes annually just to keep pace with population growth,” Ben-Shahar said.
Yet, even this demand cannot be met. Mualam points to a growing trend of “housing units on paper” — a system where buyers commit to properties before they are built, providing developers with upfront payments but with no guarantees on delivery timelines. This practice has created a speculative housing market, where prices continue to rise based on expectations rather than completed construction.
The war’s impact on the construction sector
The war has exacerbated the housing shortage, primarily due to disruptions in the construction sector. Palestinian workers, who make up a significant portion of the workforce in Israeli construction, have largely disappeared from the market since October 2023. This shortage of labor has brought many ongoing projects to a halt. Mualam notes that even before the war, the COVID-19 pandemic had already constrained the ability to produce new housing, as fewer workers from the West Bank and Gaza entered Israel’s major cities.
Moreover, as the war has intensified, construction companies face additional delays due to the mobilization of business owners and employees for military reserve duty. This has affected the ability to plan and execute new developments.
For instance, when reached for comment, the head of H.K.R. Construction Group in Kfar Saba responded via text message, explaining that he was currently serving in the reserves in the north and unavailable to discuss the impact on his company. Such disruptions illustrate the far-reaching effects of the conflict on the housing sector.
Rising interest rates and international demand
Another factor contributing to the high cost of housing in Israel is the recent surge in interest rates. Ben-Shahar noted that the ongoing war has led to a rise in Israel’s risk premium, which in turn has caused a significant downgrade in the country’s credit rating. As the central bank keeps interest rates high to combat inflation, the cost of homeownership continues to climb.
Yet, unlike in other countries, inflation expectations in Israel remain stubbornly high.
“Talks of further interest rate hikes are ongoing,” Ben-Shahar said, suggesting that the situation may worsen before it improves.
Interestingly, while local demand for real estate has softened somewhat due to the war and the economic challenges it has brought, foreign interest in Israeli properties has surged.
Real estate broker Yuri Wolosov with the Armon Real Estate Agency in Bat Yam reported a noticeable influx of buyers from abroad, particularly from the United States and France.
“I’m getting calls from wealthy Jewish clients in New York and Paris looking to purchase properties in Israel, often not for immediate use but as a hedge against rising antisemitism in their home countries,” Wolosov said.
Indeed, the Anti-Defamation League has documented more than 10,000 antisemitic incidents in the United States since October 7, 2023, a 60% increase from the previous year. “People are scared,” Wolosov added. “The feeling is that something worse is coming.”
Despite these fears, the wealthy clients with whom he works do not hesitate to spend. “They’re buying homes worth 4 or 5 million shekels — about $1.5 million — without a mortgage,” he said. “These are not cheap properties.”
A crisis for first-time buyers
For young, first-time homebuyers, the current market presents an almost insurmountable challenge. Ben-Shahar admitted that the situation is dire, especially for those looking to settle in Israel’s central areas.
“We are already seeing a large portion of Israeli households unable to afford homes in central cities like Tel Aviv and Jerusalem, forcing them to look toward peripheral areas like Beersheba or Haifa,” he said.
The high cost of housing, combined with soaring interest rates, means that many first-time buyers find themselves squeezed out of the market.
“These rising prices and high interest rates create a situation that is simply untenable for new households trying to enter the market,” said Ben-Shahar.
A shift in homebuyer priorities
The war has also influenced what homebuyers are looking for. Wolosov notes that, among those still purchasing homes, there is a growing demand for new properties with built-in safe rooms, known as a mamad, reflecting heightened security concerns. For some, upgrading existing homes to include reinforced safe rooms has become a priority, especially for those unable to relocate.
Eli Perlowitz, an independent contractor specializing in home renovations in Jerusalem through his company Jerusalem Construction, confirmed the increased demand for safe room upgrades.
“I’m seeing more requests from clients wanting to fortify their safe rooms. Some even want bomb shelters installed in their backyards,” Perlowitz said. “In this new reality, having a secure space in your home has become the most important housing amenity.”
