Israeli house prices rising faster and faster
Last Updated: May 21, 2015
When adjusted for inflation, house prices rose by 8.66% in 2014. On a quarterly basis, nationwide house prices rose by 2% (2.1% in real terms) during the latest quarter, Q4 2014.
Gush Dan saw the highest house price increase during the year to Q4 2014, with prices rising by 14.69%. It was followed by the Southern district (13.81%), Sharon (10.98%), Tel Aviv (10.19%), and the Center and Jerusalem Periphery Towns (9.26%).
Other districts such as the Northern district and Jerusalem also experienced moderate year-on-year house price growth of 6.5% and 6%, respectively. Meanwhile, house prices in Qrayot Haifa (3.55%) and Haifa (2.31%) had relatively smaller increases, compared to other districts.
The country’s most expensive housing can be found in Tel Aviv, with an average price of owner-occupied dwellings of ILS 2,480,800 (US$ 640,701) in Q4 2014. It was followed by Jerusalem at ILS 1,712,700 (US$ 442,329) and Sharon at ILS 1,694,600 (US$ 437,654).
Israel experienced dramatic house prices rises in 2009 and 2010, despite domestic political uncertainty, security threats, and the global financial meltdown. The housing market returned to robust growth in 2012 and 2013.
- The average price of owner-occupied dwellings rose modestly by 4.1% (-0.49% inflation-adjusted) in 2008
- Property prices rose by 22.35% (18.15% inflation-adjusted) in 2009
- Property prices rose by 17.04% (14.22% inflation-adjusted) in 2010
- Property prices rose by just 0.04% (-2.39% inflation-adjusted) in 2011
- Property prices rose by 5.82% (4.12% inflation-adjusted) in 2012
- The average price of owner-occupied dwellings rose by 7.38% (5.43% inflation-adjusted) in 2013.
Demand is starting to pick up after declining in 2014. In March 2015, the total number of dwellings sold rose by 34.3% y-o-y to 2,478 units. In 2014, the total number of new dwellings sold was 22,492, down by 9.9% from a year earlier. Similarly, the total quantity demanded also fell by 8.8% y-o-y to 40,728 units in 2014. The decline was attributed to the announcement of a 0% VAT plan by then Finance Minister Yair Lapid in March 2014, designed to exempt first-time home buyers from the 18% VAT. Globes reported that the announcement led to many frozen deals and to a sharp decline in new home purchases.
However, Prime Minister Benjamin Netanyahu suspended further discussion of the 0% VAT plan in early September 2014 and demanded that Lapid freeze the bill. The following day, December 2, 2014, PM Netanyahu fired Lapid from his post as Finance Minister, along with Justice Minister Tzipi Livni.
The total number of dwelling completions rose by 49.1% y-o-y In February 2015 to 4,415 units, according to the CBS. In contrast, dwelling starts fell by 5.9% y-o-y to 3,947 units in February 2015.
Property in Tel Aviv is very expensive, and rental yields are poor
Gross rental yields i.e., the rental return on a property if fully rented out, before all expenses, are poor - almost at Monaco-like levels. Gross rental yields for apartments in Tel Aviv are under 3%.
This tends to support the popular view that property is somewhat overpriced in Israel.
Apartments in upscale residential areas of Tel Aviv cost on average US$ 11,500 per square metre (sq. m). A 120 sq. m apartment now costs around US$ 10,700 per sq. m., whereas three years ago, it only cost around US$ 7,800 per sq. m.
These are the sort of prices that can be seen in Swiss cities of Geneva and Zurich, or in Canada’s Toronto and Vancouver.
Renting an apartment in Tel Aviv would cost you anywhere from US$ 21 per sq. m. per month to around US$ 28 per sq. m. per month, which means that you can rent an 80 sq. m. apartment for about US$ 2,250 per month, and a 120 sq. m. apartment for around US$ 2,800 per month.
Effective income tax rates are low in Israel
Rental Income: Rental income is taxed in Israel. Taxpayers can opt for a flat 10% tax on gross rent (without any deductions), or progressive income tax rates on net income.
Capital Gains: Most properties sold in Israel are exempt from capital gains tax. If the gains are taxable, the net gain is taxed at the standard income tax rates.
Inheritance: Israel has no inheritance tax.
Residents: Resident individuals are taxed on their worldwide income and capital gains at progressive rates, from 10% to 48% in 2012.
Buying costs are low in Israel
Roundtrip transaction costs, i.e., the costs of buying and selling a property, are around 6.236% to 7.236% of the total property price. The buyer shoulders most costs. Buyers must check what is included in the purchase price because property in Israel is sold with just the bare walls, unless otherwise agreed. Buyers must also check first if the land is zoned for building, not for agriculture.
Research in this field is on-going.
Healthy economic outlook for 2015Israel's economy performed well during the last quarter of 2014, with annualized real GDP growth of 6.8%, way up on 0.2% the previous quarter, 1.7% in Q2 2014, and 3% in Q1 2014, according to the CBS:
In Q4 2014:
- Private consumption was strong, rising by 7.9% y-o-y.
- Government consumption rose by 8.5%.
- Exports surged by 12.7%, following meagre growth of 1.3% the previous quarter, while imports contracted by 2.9%.
Israel’s economy expanded by 2.8% during the whole year of 2014, a slowdown from the previous years’ expansion of 3.2% in 2013, 3% in 2012, 4.2% in 2011, and 5.7% in 2010, according to the IMF. The slowdown was partly due to the Operation Protective Edge launched by Israel in July 2014, which aimed to stop rocket fire from Gaza Strip to Israel. The operation lasted for more than one and a half month. Both parties accepted a cease-fire on August 26, 2014.
The Bank of Israel expects 3.2% GDP expansion in 2015 and around 3.5% in 2016.
In March 2015, the country’s unemployment rate was 5.3%, according to CBS. Despite the economic slowdown in 2014, unemployment fell to 5.9% from around 6.2% in 2013.
Inflation was -1% in March and February 2015, down from -0.5% inflation in January 2015, according to the CBS. In 2014, the country’s budget deficit was around 2.8% of GDP.
The BOI’s target of 1-3% inflation is seemingly unattainable this year as the central bank’s research department predicts -0.1% inflation in 2015. The target is only expected to be reached in 2016, when inflation is predicted to rise to 1.7%.
Prime Minister Benjamin Netanyahu, of the Likud party, retained his post as Israel’s prime minister after winning the latest legislative election last March 2015. Likud won 30 seats, while the opposition Zionist Union came second, nabbing 24 seats.
Likud’s win came as a surprise since it had trailed behind the Zionist Union in pre-election polls prompting PM Netanyahu to state that a Palestinian state will not be established during his term (if he remained in power), in an interview published by the daily Maariv newspaper before the March 17 elections. This statement, though now retracted, and Netanyahu’s return to power, puts Israel in a difficult position in relation to the US and the international community's support for the establishment of a Palestinian state in East Jerusalem, the Gaza Strip, and the West Bank.