Real estate price boom may be over

Potential home buyers are apprehensive, fearing prices will continue to rise as they did in 2006 to 2007.

Tel Aviv property 88 224 (photo credit: Ariel Jerozolimski)
Tel Aviv property 88 224
(photo credit: Ariel Jerozolimski)
The real estate market entered 2008 with a certain amount of trepidation. Potential home buyers are apprehensive, fearing that real estate prices will continue to rise as they did in 2006 to 2007. And those who invested in real estate, in what for them were halcyon years, fear that prices may fall in the future. According to Bernard Raskin, CEO of Re/Max Israel, there is no need to fear one or the other. In 2008, prices will probably not rise at the same levels they did in 2006-07, and it is most unlikely that they will fall during 2008, he said. But before explaining what can be expected from the local real estate market in 2008 a few words on the past. From 1996 to 2004 or 2005 Israel experienced the longest, and in some ways sharpest, real estate depression in its history. Prices fell by 20 percent to 25% on average, while some categories, particularly expensive real estate, fell by up to 40%. This was something new in Israel. In the past there had been real estate slowdowns, but prices usually fell 5% to 10% at the most. This time it was different. In 2005 the industry started to recover; in 2006-07 demand and prices rose with a vengeance. In those two years prices in Tel Aviv rose by 25% on average, while prices for some categories, such as two-room apartments and apartments with a sea view, appreciated much more rapidly. In Israel as a whole, prices rose by 14% on average, while most of the rise in prices was concentrated in the central regions; in some places, such as Beersheba and Haifa, prices actually fell. According to Hanan Schlesinger, CEO of the Anglo Saxon chain of real estate agencies, the prices mechanism in 2008 will operate differently than in the past two years. "The price increase in Tel Aviv real estate has reached unrealistic levels," he said, "and the number of those who can pay those prices is diminishing fast. Thus, prices in Tel Aviv will probably remain stable and even fall in the short run a few percentage points. "What I think will happen in 2008 is that prices in the peripheral areas of Tel Aviv, such as Petah Tikva, Rosh Ha'ayin, Ness Ziona, Be'er Ya'acov and Rehovot, will rise in relation to real estate prices in Tel Aviv. Consequently, the differential between prices in Tel Aviv and the surrounding areas will moderate." The upward pressures on Tel Aviv real estate prices may continue in the second half of the year because demand for rentals in Tel Aviv is the highest anywhere in the country. This creates investment demand from those who want to buy apartments and derive an income from renting them out. Another source of demand is that of middle-aged couples whose children have left home. Their single-family homes in Savyon, Ramat Hasharon, Herzliya, Kfar Shmaryahu and elsewhere are now too big for their needs, hence they want something smaller in the center of town. The demand for real estate in Tel Aviv proper has been dampened by recent price rises, but it is still there. Furthermore, it cannot be easily met because housing starts in Tel Aviv are insufficient to meet demand. If there were enough potential home buyers with the necessary cash, the gap between housing starts and potential demand would probably force prices up quickly. But as things stand, real estate prices for what can be termed the middle classes have become unaffordable. According to a price list supplied by Anglo Saxon, the price of an average 120-square-meter apartment in central Tel Aviv, which is far from being an expensive area of town, is NIS 2.05 million, or some $540,000. With that kind of money, one can buy two such apartments in Haifa, nearly four in Beersheba and 1.5 in Modi'in. The middle classes are shifting gear and moving out. According to Raskin, the shift to the suburban areas is gaining momentum. Because of the price rise in Tel Aviv and the scarcity of accommodation, sectors of the population who would never have contemplated living in Rosh Ha'ayin or Be'er Ya'acov are now doing so. This shift to the outlying areas of Tel Aviv is having a bearing on the construction companies. According to Haim Cackon, sales manager of the Bonei Hatichon development and construction company, "We have been expecting this trend for a long time. There has always been a trend from Tel Aviv to the outlying areas, but now we are witnessing the migration of high-income families who hitherto would have made big sacrifices to remain within the municipal boundaries of Tel Aviv. Now these families are moving out. But despite the fact that they are moving out, they still demand high-quality dwellings. "That is why we are building dwellings of a quality previously unknown in places such as Modi'in, Ashdod, Or Yehuda and Petah Tikva."