Housing prices to drop in Israel’s major cities, new report says
Housing prices are expected to stabilize and even drop over the coming year, and the price decreases may continue into 2024 as well – that’s the projection of Bank Leumi analyst Alon Cole Krise, in his monthly review of the housing market.
Should his projection be borne out, it would be joyful news to the public, which has been long awaiting a price drop, but bad news to some developers. “Should a drop in housing prices indeed materialize over the next two years, an increase is possible in the system-wide risk rate,” the Leumi analyst writes.
Cole Krise added that “The increased risk is expected mostly for developers who based their profit margins from construction projects on significant expected future increases in apartment prices.”
And indeed, the capital market saw steep drops in the value of securities issued by developers who have recently paid top prices for construction lots in north Tel Aviv, due to concern for their stability.
Prices are expected to drop mainly in Jerusalem and cities in Gush Dan, the greater Tel Aviv area. The analyst estimates that the housing prices in these cities are the highest in comparison to local incomes.
The rise in housing prices – 20 percent over the past year – compared to household incomes was the main reason for the drop in housing sales in the past two months, says Cole Krise. So, too, was the increase in mortgage interest rates, which pushed many potential buyers out of the market.
Other factors driving the slowdown in the housing market are the increased tax rate on investors, and the many raffles held by the Housing and Construction Ministry as part of the “Target Price” and “Priced to Occupy” (“Mechir Matara” and “Mechir La’mishtaken,” respectively) programs, following two years of abeyance. Over the last year, some 28,000 homes were marketed through these channels.
Construction starts up
The drop in housing sales in the past six months is the sharpest since the Central Bureau of Statistics began reviewing market trends in 2004. The drop is explained partly by “a correction following a particularly high pace of sales early in the year, and partly by the sharp increase in housing prices and the growing gap between the public’s incomes and housing prices.”
Bank Leumi’s analysis goes on to state that “The increase in housing prices was paid for in the past by low-interest loans, but rising interest rates reduced purchasers’ ability to increase their credit and finance the increased housing price.
Another factor that apparently plays a role is lower prices in the money market, draining household financial equity, which is directly or indirectly invested in the stock markets.”
However, Cole Krise also points out an increased housing supply, due to an increase in houses under construction, mostly in the first half of 2022. The recent year saw construction starts on 73,000 housing units, a 28-year-high, and Leumi expects that to rise to 80,000 in the coming year.
This data also aligns with surprising figures published by the Israel Land Administration, regarding the sale of land for housing in 2022.
The expected rate of construction starts is one third higher than what is needed to meet regular demand – a figure estimated at 60,000 new housing units per year. Concurrently, the state has increased the marketing of land over the past two years.
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According to the CBS’ measurement, the increase in construction starts, combined with the drop in sales, led to an increase in the contractors’ unsold apartment stock. This figure is calculated by subtracting the number of apartments sold from the number of houses whose construction started in the period measured.
Cole Krise expects the inventory to grow due to developments in the field. “The increase in unsold supply harms the developers’ cash flow, and given increases to their financing expenses, it seems that over time some of them will have to reduce prices.
“Our main scenario has housing prices over the coming year in the range from stabilizing to a single-digit drop in nominal terms (on a national average), with a moderate drop in prices possible in 2024 as well. Conditions conducive to price decreases seem more fundamental in Gush Dan and in Jerusalem, due to the very high housing prices in these areas (relative to incomes) and an increase in supply.”
Cole Krise specifies that “in the medium range, the conditions for excess supply that’ll lead to price drops exist mostly in the southern region.”
Interest rates to rise
Leumi’s projected decline in demand relies on, among other factors, the expected continued rise in Bank of Israel interest rates – up to 4 percent, from the current 3.25 percent and stricter conditions imposed by lenders on mortgages.
While construction starts are on the rise, completions lag behind, with the figure for the 12 months from July 2021-June 2022 standing at 50,000 – far fewer than the 60,000 a year needed to meet the market’s needs.
The Central Bureau of Statistics has studied this gap and has ruled out the claim that the prolonged construction times are caused by a lack of labor or equipment. The study shows that the cause is the increase in construction projects, stimulating developers to spread their resources over many projects concurrently, prolonging the construction of each.
Another cause seems to be the decline in developer bond interest rates, as low interest rates reduce the developer’s penalty for construction delays.
Cole Krise writes further that last year’s interest rate hikes are expected to boost construction speed and increase the number of completed units. A final factor noted by Leumi’s analyst is the large number of urban renewal projects, which are built under complex conditions that inhibit rapid delivery.