The real estate market is in a state of flux.After three years of uninterrupted rises in prices and strong demand, both demand and prices have stalled. The industry is in flux because demand seems to be shifting from the Tel Aviv metropolitan area to more peripheral areas. In consequence, it is difficult to predict future trends.The future is uncertain but the past is clear enough, and it goes a long way in explaining the reasons for the current uncertainties.A survey commissioned by Merkaz Habnia Ha’Israeli to the Geocartography Institute revealed that the average price of real estate rose by upwards of 40 percent.Eran Levi, owner of the Ambassador real estate company, told Real Estate, “Despite the fact that the market seems to be in a state of flux, this is a temporary situation because in the first half of the year demand for real estate was strong and prices continued to rise. In my opinion, demand will start anew and prices will rise in the future.”The hefty rise in prices in the past two years explains why the government is so keen to bring down real estate prices and why prospective buyers are drifting toward peripheral areas.Real estate prices have become beyond the reach of many, and it has become a burning social and political issue.In 2010 average real estate prices have risen by 14%, while salaries rose by just over 3%. According to expert opinion, housing prices will continue to rise.Nissim Ahiezra, CEO of Donitz Bros. Development and Construction, believes that prices will continue to rise because supply will fall short of demand. “I do not see any changes in the near future that will increase housing starts – supply. So if demand is larger than supply, it stands to reason that prices will rise.”Supply has been one of the main problems of the industry, despite the fact that the government is increasing the sale of building land and the Bank of Israel is curbing the regulations that are making mortgages more expensive and placing limits on the size of the mortgages.According to the Bureau of Statistics, in 2010 just over 39,000 new households came into existence. This includes newlyweds and singles leaving the parental home. To this must be added demand by overseas buyers and properties gone derelict, In total, approximately 41,000.During 2000-2010, housing starts amounted to 316,942 or an annual 31,694 on average. A 10-year shortfall of 93,058 dwellings.These figures explain why prices are rising constantly, but there are other reasons as well.Gil Attias, the CEO of the Forma Construction Company, a member of the Danya Cebus group, told Real Estate, “ I don’t think that prices can fall in the foreseeable future. Forma is a construction company, not a development company.We are in the business of construction only. We don’t sell finished apartments, so I don’t want to comment on the supply and demand situation and how it affects prices. What I can say is that construction costs are rising constantly. The price of construction materials is high, while the acute shortage of labor is increasing their cost.”In 2010, prices rose by 14%. In 2011 prices may stabilize, but in 2012 prices will probably rise because housing starts may fall to below the 2011 level.Bernard Ruskin, general manager of RE/Max Israel, believes that prices will increase an average of 7% and more.“The government is taking steps to increase demand, but these measures will only be felt in two or three years. In 2012, demand will still outstrip supply, and in these circumstances prices can only rise.”In the meantime, demand is increasing from other quarters. The economic crisis in the US and in the UK, which is not in the problematic euro zone, may increase.In the last six months demand for local real estate from the Diaspora is growing.In addition to the improved economic situation in the US and non-euro zone countries, there is demand from continental Europe.Some countries of Western Europe, especially France, are becoming somewhat uncomfortable for Jews. There is a very large Muslim population. In the not so distant past the two communities got on well together, but in the past years the conflict in the Middle East has spread to Europe, and the Jews in those countries are at the receiving end of Muslim hostility. If on top of this there is an economic crisis, then anti-Semitism, which is never far from the surface in mainstream France, may emerge in the open. That is why many French Jews are buying property in Israel.The expected increased demand in 2012 without a corresponding rise in supply may drive prices up.Real estate prices have already reached very high levels. In the Tel Aviv metropolitan area, they have reached their full potential. Despite the fact that most experts believe that the average real estate prices will increase in 2012, it is doubtful whether prices in the Tel Aviv metropolitan area will rise because very few prospective buyers can afford prices at today’s levels. Any rise in prices will place them beyond the pale.The only segment in the Tel Aviv metropolitan area that may experience a rise in prices is the very expensive real estate. Overseas buyers may drive the price of expensive real estate upwards.The high real estate prices in the Tel Aviv area are increasing demand and pricss in the outlying areas of Tel Aviv and Jerusalem. This included Modi’in, Rosh Ha’ayin, Yavne, Hod Hasharon and Netanya. They are all near Tel Aviv, and the upgraded railway and road network makes it easier to get to work in Tel Aviv.Modi’in is midway between Tel Aviv and Jerusalem. It has a population of approximately 80,000 compared to 40,000 five years ago. The city plans to reach 200,000 to 250,000. An average three-room, 75-square meter apartment in Modi’in costs between NIS 1 million and NIS 1.2 million. A four-room apartment of over 90 sq.m will cost between NIS 1.4 million and NIS 1.6 million. And prices in 2012 may rise.The same holds true for Ir Yamim in Netanya. It is a 25-minute drive from Tel Aviv. The average price for a secondhand four-room apartment is NIS 2.2 million if it has a sea view and is high up in the building. An apartment without a sea view and on a low floor is NIS 1.8 million.New four-room apartments on a relatively low floor are offered at NIS 1.98 million.Prices in Ir Yamim have doubled in the past five years, but it is doubtful whether they will continue to rise at these levels.But the proximity to Tel Aviv will probably increase prices in 2012 by 5% to 7%.Prices may also rise in Beersheba and Haifa. These are university towns, and rental demand is high and real estate prices still low.In Beersheba, the price of an average four-room, 90- sq.m.apartment is NIS 470,000. It rents for a monthly NIS 2,500, an annual yield of 6.5%. An average three-room, 60-sq.m. apartment costs NIS 370,000 and rents for a monthly NIS 2,000, an annual yield of 6.5%.In Haifa, a NIS 350,000 two-room apartment will bring a monthly NIS 1,900, an annual yield of 6.5%.