Israeli homeowners enjoy high returns but not from rent

Returns on real estate for investment include two components: the rise in value of the property and the rent received.

An aerial shot of a Tel Aviv beach (photo credit: BARAK BRINKER/TEL AVIV-YAFO MUNICIPALITY)
An aerial shot of a Tel Aviv beach
(photo credit: BARAK BRINKER/TEL AVIV-YAFO MUNICIPALITY)

Homeowners in Tel Aviv received the highest returns in Israel on the apartments they owned in 2021, but not from rent, the Central Bureau of Statistics reports in a summary of housing prices and rents in Israel's 15 largest cities.

Returns on real estate for investment include two components: the rise in value of the property (less transfer tax on the profit when sold), and the rent received (exempt from income tax up to a ceiling of NIS 5,196 per month).

In terms of renting out the property, the best returns in 2021 were on a 1-2 room apartment in Beersheba. Somebody who bought an apartment for NIS 570,000 at the end of 2020 would have seen returns of 4.3% on the rent by the end of 2021, although the value of the property fell 2% in 2021 for overall returns of just 2.5%.

In terms of the national average, an apartment bought in the fourth quarter of 2020 would have provided 3% returns on rent to the owner in 2021, while the value of the property would have risen by almost 8%, meaning that overall returns amounted to nearly 11% in 2021.

Far above the average was Tel Aviv. While 1-4 room apartments in the city saw rental returns for their landlords of just 2.5% in 2021, taking the rise in the value of the property into account, investors who bought apartments in Tel Aviv at the end of 2020 saw overall returns of between 22% and 28%. The average price of a three room apartment in Tel Aviv jumped 25% in 2021 from NIS 2.28 million to NIS 3.36 million.

Downtown Haifa (credit: ZVI ROGER/WIKIMEDIA COMMONS)Downtown Haifa (credit: ZVI ROGER/WIKIMEDIA COMMONS)

Also at the top of the ranking in terms of returns in 2021 was Ashkelon, led by its 1-2 room apartments. Annual returns on renting out apartments in 2021 were 4.2% while the average price rose 20% in 2021 from NIS 615,000 to NIS 743,000, so that overall returns were nearly 25%.

Haifa and Kfar Saba also stood out with five-room apartments in these cities faring best. The average five-room apartment in Haifa cost NIS 1.86 million at the end of 2020, rising in price to NIS 2.15 million at the end of 2021. In Kfar Saba a similar apartment rose in price from NIS 2.7 million at the end of 2020 to NIS 3.1 million. In addition return on rents in Haifa in 2021 was 3% and 2.6% in Kfar Saba.

The real estate market in 2022 is expected to be different from last year. Firstly, because of the rapid rise in apartment prices, rental returns have fallen. The annual returns from rent were just 2.8% on average in Israel in the fourth quarter of 2021 and just 2% in Tel Aviv. With lower rent returns and the jump in purchase tax for investors in November, it is debatable whether it pays for an investor to buy a property. Another factor, which might dampen the market is the expected rise in interest rates, which will make mortgages more expensive.