The year 2021 was characterized mostly as an exit from the corona period and a return of buyers to the market. Apartment prices rose in Israel by an annual average of 10%. The annual increase in Jerusalem was 9.9%.
In the prestigious high demand areas, which are the established neighborhoods in the city center, prices have risen at a higher rate – by an average of 11.5%. Demand is significantly outstripping supply and the potential for construction of new apartments is limited. We believe this trend will continue for the foreseeable future due to a number of variables.
What causes the rise in prices?
The reasons for the price increase are many and varied, here are some of them:
· Very low-interest rates – financing has become cheaper and alternative investment channels continue to yield low returns.
· In the first eight months of 2021, a record of 75.1 billion NIS of mortgages were funded in Israel. In June alone, 11.6 billion NIS were funded, in August 11.9 billion NIS, and in October, 10.7 billion NIS.
· For comparison, in the whole of 2020, which also broke previous records, mortgages worth 78 billion NIS were funded over the course of the year.
· Reduced supply – In 2020, new construction began on about 51,000 new apartments, a decrease of 7.8% compared to 2019 throughout the country.
· Constructions – In 2020, new construction of 53,000 apartments was completed throughout the country. According to the Central Bureau of Statistics, about 80,000 new housing units are needed to satisfy demand.
Jerusalem 2021 – A sharp decline in construction starts in the city
In regard to new building permits issued in Jerusalem, a declining trend can be clearly seen in recent years- In 2019, 4026 of new building permits were issued in the city, in 2020, 4,483 were issued, and in 2021 there was a sharp decline in construction in the city.
In the first two quarters of 2021 there were only 836 new units built in the city, compared to 2,267 units actually built in 2020. There were 3,091 new units built in 2019.
Supply VS demand
The supply of new apartments in Israel in general, and in Jerusalem in particular, is missing demand targets by a wide margin – a fact that continues to cause prices in the city to rise.
In Jerusalem, there is no land available due to saturated construction within the city’s inner circle. The only way to expand construction within Jerusalem is by utilizing an evacuation-construction plan (Pinui-Benui) which entails the demolition of old building complexes and the construction of new residential towers. Naturally, such construction eviction procedures take a long time – on average between 5-7 years for a standard procedure without unique problems and sometimes up to 10 years from until the project is completed.
The mayor of Jerusalem supports the evacuation-construction process in the city. In spite of the mayor’s support, the bureaucracy and lengthy processes of signing the existing tenants in the buildings on the agreement with the builder predicts that it will take several more years for a critical mass of new apartments in the city’s second and third districts to be completed.
Some good news too
In recent months, several new projects have been approved by the planning committees as part of an evacuation-construction plan in Jerusalem including:
· 521 Housing units in Neve Yaakov
· 73 Housing units on the Hebron Road
· 480 Housing units in the Hantke complex in Kiryat Yoval
· 2,60 Housing units in Kiryat Menachem
· 1,255 Housing units in Katamonim.
In addition, the plan for the development of the old Shaari Zedek complex, which was purchased by Canada Israel back in 2020 for 512 million NIS, was approved.
The plan covers land in an area of about 17 dunams and will include about 1,100 housing units and a total of over 1.2 million square meters (!) of mixed uses. The plan includes offices, a conference center, culture and leisure areas, and commercial areas.
The entry of Canada Israel into a significant investment in Jerusalem, following the entry of other leading public and private real estate companies in the Israeli economy in the last few years, constitutes an expression of trust and recognition of the great potential that lies in its future development.
Demographics in the State of Israel
The future demographic growth in the State of Israel will be of the highest in the Western world. This is according to official data of the Central Bureau of Statistics and the “Israel 100” planning team, a team of leading experts and urban planners in the country. They estimate that this will happen by the year 2048 when the country celebrates its 100-year anniversary since being founded. This growth will occur due to natural population growth without waves of immigration from Diaspora Jews.
To date Israel, has built 5.2 million housing units in 73 years, in the next 23 years the state will have to produce another 5.2 million housing units just to meet the natural population growth.
Political rule changes without continuity and a clear agenda
Lack of efficient public transportation contributes to most of the population residing in dense clusters. Hence, there is no population dispersal due to the lack of accessibility and places of employment. Most of Israeli’s residents reside in Haifa in the north, Jerusalem, Tel Aviv, Beer Sheva in the south and in the center of the country from Gedera to Hadera.
Another factor contributing to the rise in property prices is the purchase of real estate as an investment. Real estate prices in Israel have always been on the rise, except for short periods when prices showed stability and sometimes even slight declines due to a complex national security situation. In recent years, and especially since the end of the subprime crisis, which began in the United States and later spread to the rest of the world, Israel has experienced sharp and continuous price increases, for the reasons detailed thus far.
Will price increase slow? Are we in a real estate bubble?
In the opinion of the experts, and the current purchasing statistics, the answer is – no. Below are some of the reasons why:
· Most of the apartments being purchased are inhabited – there are almost no empty apartments.
· The level of demand is stable and will continue to rise so long as natural demographic growth continues, combined with a persistent shortfall of new constructions.
· There are almost no foreclosures on mortgages.
· Mortgage banks are very stable and very profitable.
· Unemployment is low and wages continue to rise.
· The relevant parties, i.e. the banks and the construction companies, have no interest in lowering prices.
· The accumulated taxes to the state throughout the new construction process constitutes about 35-40% of the final sale price of the apartment.
· The government is recycling measures that have been tried in the past to cool the real estate market, by raising the purchase tax for investors and owners of second homes, which did not negatively impact markets in the past.
Epilogue
In order to slow down price increases the government must make more land available for development, remove bureaucratic barriers to obtain building permits and significantly improve on urban and inter-urban public transportation. Unfortunately, these processes take a long time to enact and even more time to perfect.
The year 2022 in Jerusalem is expected to be a year in which there will be a slight moderation in the rise in housing prices in most areas of the city, along with the continued rise in prices in the established and sought-after neighborhoods in the city center. It will be interesting to see the how the market react and how developers will pursue opposrunities in areas where large evacuation-construction complexes have been approved, such as Kiryat Yoval, Kiryat Menachem and the Katamonim.
Yours truly,
Oren Cohen, CEO and Owner – Oren Cohen Group
The company, based in Jerusalem, has been specializing for the past 25 years in marketing construction projects, selling luxury properties and unique properties, urban renewal, consulting investors and entrepreneurs from Israel and abroad.
