Israel’s housing market: Under-supplied, over-demanded - analysis

World events play a huge role in the expanding gap between real estate supply and demand.

Real estate market (photo credit: Courtesy)
Real estate market
(photo credit: Courtesy)

If you’re waiting for the right time to purchase real estate in the Start-up Nation – keep waiting.

The Central Bureau of Statistics has released a slew of reports detailing the Israeli economy as of February covering a range of topics from job vacancies to teaching staff; a report on the all-powerful Consumer Price Index that illustrates an increase in the prices of fresh fruit and vegetables (5.3%) and transportation (1.9%); and a report on the housing market that shows prices are rising at an increasing rate.

The Israeli real estate market broke new ground between December and January, with a price increase of 2.1%, the steepest climb that the market has seen in the past 10 years. That increase continues to model what is beginning to take shape as a steep upward curve in housing costs since October.

The reason for such a sharp jump in real estate pricing can be attributed to a host of factors, all of which have driven demand higher than the current supply can maintain.

“At the end of the day, it’s the same as any other business, it’s supply and demand,” explained Barak Daon, owner of Daon Group Real Estate.

 Ukrainian refugees are seen arriving in Israel as part of Operation Israeli Guarantee, on March 6, 2022. (credit: Sraya Diamant/GPO) Ukrainian refugees are seen arriving in Israel as part of Operation Israeli Guarantee, on March 6, 2022. (credit: Sraya Diamant/GPO)

Daon said that the increase in demand – especially in Tel Aviv, which has seen a 2.1% price increase in and of itself – could partly be a result of international travelers who are coming for work, family, or simply “because they’re looking for a safe haven in case something happens.”

Between the ongoing corona pandemic and the onset of international war in Eastern Europe, there is certainly plenty to worry about, and for many, settling into a home in Israel just makes sense.

“Lately, people are purchasing out of fear that they won’t have where to live, out of fear that something will happen in their country,” said Daon.

On that note, the war in Ukraine is directly impactful in the situation: Ukrainians fleeing from their country and seeking asylum in other nations are expected to trigger a wave of increased demand in Israel, which has begun to take in both Jewish and non-Jewish refugees.

Typically, as real estate demand in Israel decreases so too does supply, which is made clear by housing market prices remaining reasonably stable for a decade. In this case, however, it hasn’t been as easy for builders to match that demand.

“The whole process got pushed back by two or three years,” said Daon, and that government municipalities were reluctant to approve new constructions as a result of the pandemic. As such, only a fraction of the housing units required to meet demand has been built in recent years.

Furthermore, while the government is doing its best to convince the country that things will soon be back on track, there are strong indications that it may just be lip service.

“The government always talks about ‘oh, we just approved 250,000 units this year,’ but it’s wrong,” said Daon. “They’re approving the land for development. There are a lot of years between the land getting approved and construction, and we’re looking at 250,000 units needed for new families, immigrants, all that.”

The price increase is therefore the result of a bidirectional attack on the market – demand is inflated by world events, while those same world events are preventing supply from keeping up.

There may be a glimmer of hope in the near future, though: while the demand will continue to rise, as it usually does, the government is approving new construction at a gradually increasing pace. Prices in the short term may continue to rise, but within the next five or so years – as new construction is planned, built, finalized and introduced to the market – the balance may finally begin to regulate, though “regular” pricing in the blue and white state may still give you a run for your money.