Israel’s housing market still thriving

by Editor

The housing market is one of the markets most affected by interest rate increases in Western countries. Sharp interest rate increases make it difficult for buyers to continue borrowing large-scale mortgages, and as a result, home markets in many places have shifted from a state of sharp increases to a state of significant price declines. This has occurred in the US, Canada, Australia, and New Zealand.

But there is one country where this has not yet occurred Israel.

The most recent home price index, showed a 1.3 percent increase, for a 17.9 percent annual increase. The question is why the Israeli real estate market has remained so resilient in the face of sharp interest rate increases.

The situation in Israel has been different thus far, raising the question of why. After all, the increase in interest rates has resulted in a significant increase in mortgage borrowers in Israel, who, according to the Association of Mortgage Consultants, are now forced to pay an additional NIS 1,000 per month. According to recent Central Bureau of Statistics (CBS) publications, while the number of transactions for the purchase of a home has decreased significantly, by approximately 30% less than in the same period last year, home prices have continued to rise.

One distinguishing feature that emerges in every discussion about Israeli home prices is Israel’s exceptional demographic growth rate, which in 2021 is expected to be around 1.8%, compared to 0.7% in the United States and 0.8% in Canada. With such a rate of growth, the pressure on apartment demand is intense, with or without interest.

Another important feature of the Israeli housing market that may explain why the interest rate increase had little impact is the lack of an alternative for Israeli homebuyers. Unlike in most Western countries, where there is a sophisticated long-term rental market that provides a quality alternative to living in an owned apartment, the rental market in Israel is still almost entirely based on apartments owned by private households and offering one-year contracts. As a result, all households are vulnerable to annual rent increases and, in some cases, unilateral notice of rental termination. It’s easy to see why, in such a situation, most Israeli households want to buy an apartment to avoid the risk and instability of renting.

Despite all of the aforementioned explanations, it is impossible to rule out the possibility that an increase in interest rates will eventually lead to a change in trend in the Israeli housing market. Six months have passed since the Bank of Israel began raising interest rates, and the most recent home price index relates to transactions completed in June and July—that is, no more than three months after the rate hike began. It is possible that the market will take some time to internalize the new rules of the game, and that a price drop will occur here as well.

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