Is it time to seize opportunities in Israeli real estate

We entered the Swords of Iron war with a stagnant housing market. The sales data for new and second-hand apartments resembles levels from 20 years ago during the second intifada. However, a chief economist at the Ministry of Finance reports a significant recovery in the housing market. 

Surprisingly, this recovery is most noticeable in Rehovot and Rishon Lezion, two cities within missile range from Gaza.

So, is it time to buy an apartment? Maybe, time will tell. But, it is definitely the time to search for and seize opportunities in the Israeli housing market. The opportunities are there, and even if you don't buy, it's worth checking the market so that you aren't' left with any regrets.

The current war in Gaza is different from previous conflicts. It has hit at the heart of every citizen, impacting everyone in a way never experienced before. This war is not comparable to the victory of 1967, or the challenges faced during the Yom Kippur war in 1973 or previous operations in Lebanon and Gaza.

While we cannot change the past, we can endeavor to make the best out of every situation. This can be achieved through accelerating urban renewal, eliminating bureaucratic obstacles, and bringing opportunities for construction companies in the periphery. 

Additionally, long-term rentals could provide guarantees for entrepreneurs, helping them regain interest in the market. Not only can these actions benefit the real estate market, but they may also help mitigate potential future challenges.

When it comes to buying an apartment, timing is crucial. The best time to buy is when the market starts to rise and everyone else is buying. We often look with envy and admiration at those who took advantage of opportunities and became wealthy. On the other hand, perhaps the time to buy is already here. 

The first interest rate cut has already been registered, and more are expected to follow. This initial cut signifies an opening shot. In the United States, the Federal Reserve's projections for interest rates in 2024 reveal a potential downward trend. 

Is there a directional signal for investors? Let's use Tel Aviv as a case study. Half of the city's apartments are owned by investors and available for rent. This resulted in a significant 55% decline in the average purchase of investment apartments in the city in 2023.

Before the war, in the month of July, only 113 apartments were purchased by investors in Tel Aviv, marking one of the lowest levels in the past two decades. Post-war, these numbers have further dwindled. Investor purchases during October across the entire country totaled only 411 apartments, reflecting a sharp 56% drop compared to the previous October and a 54% decrease from the preceding month.

The Beer Sheva region also witnessed a notable decline in investor purchases in 2023, despite a surge in contractor sales. The chief economist at the Treasury pointed out that the sales promotions by contractors, which used to attract increased investor purchases, are no longer as effective. This trend of decreased investor purchases spans nearly all regions, with the Beersheba region particularly noteworthy, experiencing a staggering 77% drop compared to October of last year. Jerusalem was the sole exception, maintaining a stable level of investor purchases in October this year, partly due to global Jewish interest, albeit at a relatively low volume (97 apartments).

While investors are expected to reactivate, there's a call for the government to reduce purchase taxes and ease the process. This move is anticipated to channel money into the treasury through taxes rather than questionable foreign investments.

An analysis by Ohad Danos, the former chairman of the Real Estate Appraiser's Chamber, reveals a six-month trend of rental market price decreases from June to November 2023. Tel Aviv (-4.3%), Modi'in (-4.6%), Petah Tikva (-4.6%), Rishon Lezion (-4.0%), and Netanya (-4.0%) are notable cities with declines in various apartment types. Jerusalem, however, experienced a 9% increase during this period due to increased interest from Jews abroad.

In terms of returns, Beersheba leads with an average annual return of 4.2%, followed by Eilat at 3.7%, while Rehovot records the lowest at 2.5% due to a substantial increase in apartment prices compared to falling rental prices.

The dynamics of supply and demand play a pivotal role. Construction starts have been decreasing since the beginning of the year, exacerbated in the last few months due to a shortage of workers since October 7. While a sales recovery was noted in November-December, the growing demand lacks a sufficient stock of apartments. The increasing interest from Jews abroad facing antisemitism may further boost demand, exacerbating the existing housing shortage.

On the eve of the war, contractors held an unprecedented inventory of 61,400 unsold apartments, primarily in the periphery. The surplus allowed construction companies to provide housing to evacuees in the initial days of the evacuation.

Contractors are urged to introduce special offers and favorable conditions to stimulate apartment sales. Most new apartments offered for sale are concentrated in the central area, with 30.7% in the Tel Aviv district and 25.0% in the central district.

Ashkelon leads in new apartment purchases on the eve of the war, surpassing Jerusalem and Tel Aviv-Yafo. Notably, Sderot also experienced a peak with 445 apartments purchased.

Opportunities emerge, such as special offers from contractors requiring only 15% or 20% payment upfront. The increase in interest rates starting in April 2022, reaching 4.75% within a year, is a key factor in the current market situation. Contractors, expecting only rising prices, paid substantial amounts in management tenders, unprepared for a sales collapse and subsequent price drops.

Considering the future, with Israel's highest population growth rate listed as the highest in the OECD at 2.5%, there is a projected need for a significantly increasing available housing in the next two decades. Dr. Eil Argov from the Bank of Israel's research department warns that while the large inventory may lead to short-term price decreases, the shortage of workers and decreased construction activity in the last quarter of 2023 will likely result in long-term increases in apartment prices.