August 17, 2021

Home price gap widens between Tel Aviv and the rest

Globes, Arik Mirovsky, 17.08.2021

The average home transaction price in Tel Aviv in the second quarter of this year was over NIS 3.5 million, 20% more than two years ago. The heart of the Israeli housing market is booming, and it appears that there are people prepared to pay any price to live in the big city. This is what emerges from the Central Bureau of Statistics' data on home prices in the second quarter, released earlier this week.

The data show that the price gaps between the large cities are widening, amid a general rise in prices that has taken hold since the first phase of the coronavirus pandemic. One finding is that the stock of new homes for sale is rapidly declining, as the public grabs apartments from contractors at an exceptional rate.

Four-room apartments up 14% in one quarter

As mentioned, Tel Aviv heads the upward price trend. In the second quarter of this year, deals were signed in the city at prices 10% above those of the first quarter. The average price of a small apartment of one to two rooms rose by 12% to NIS 2.42 million; prices of three-room apartments rose by a similar percentage, to NIS 3.2 million; while prices of four-room apartments rose by 14% within a single quarter, to NIS 4.28 million. Prices of five-room apartments actually fell, by 0.8%, to NIS 4.7 million.

The surge in home prices in Tel Aviv widened the gap between them and the prices of equivalent homes in other large cities. If two years ago an apartment sold in Tel Aviv was on average 41% dearer than an equivalent apartment sold in Ramat Gan at the same time, that gap has now widened to 54%. Versus Jerusalem, the gap has widened from 46% to 67%, and versus Haifa it has stretched from 139% to 200%, meaning that an apartment in Tel Aviv costs three times as much as an equivalent apartment in Haifa.

This is probably why the chief economist at the Ministry of Finance reports in her real estate market survey that the number of transactions taking place in Tel Aviv is substantially lower than in the past. With prices like these, the city is rapidly becoming closed to large sections of the population that cannot afford them.

In general, housing transaction prices in the second quarter were 3% lower than in the first quarter of 2021. The average apartment price fell to NIS 1.65 million. A possible explanation is the 5% jump in prices in the first quarter in comparison with the fourth quarter of 2020.

New home prices up 6.5% in two months

As mentioned, the stock of new homes for sale is declining. According to the Central Bureau of Statistics, in May and June alone, 10,600 new homes were sold. That is more than half the total number of new homes sold in 2011, and almost half the total number sold in 2018. This is historically extraordinary behavior, the like of which was perhaps seen during the wave of immigration 30 years ago. About 20% of it is explained by purchases in the subsidized Buyer Price program.

To broaden the view a little, in the first half of this year, more than 25,000 new homes were sold in Israel. That is a dramatic statistic, because the rate of purchases of new homes is higher than the rate at which they are being built. Within a year, the stock of new homes for sale has fallen by 30%, reaching about 36,000 at the end of June. If this rate should continue, the government will be unable to find any way of increasing the supply of homes, and the only tools remaining to moderate the price rises will be taxation measures, and further restrictions on mortgages such as have already been introduced. Will these tools be effective? That is a hard question. The prevailing assumption in the government is that investment buyers are mainly to blame for the rise in prices, but there is also a considerable rise in demand on the part of young couples.

Developers have caught onto the demand for new homes and have rushed to raise prices. The New Dwellings Price Index has risen by almost 6.5% in the past two months, which compares with a 7.7% annual rise in prices of all homes, something that people should take into account before signing a deal to buy a "home out of the wrapping". Another important statistic in this context is the Building Inputs Price Index, which is rising at an annual rate of 6-7%, and is liable to cause problems to buyers of new homes who fail to take it into account.

Rents at a standstill

While home prices soar, the rental market remains much slower. The Housing Services Index rose just 2% in the past twelve months, and prices in rental contracts signed in the second quarter of this year fell, though only slightly, by less than 0.5%. The average monthly rent was down just NIS 10, at NIS 4,080.

The most expensive apartments included in the Central Bureau of Statistics' data are five-room apartments in Tel Aviv, which are being rented at NIS 9,300 a month. The cheapest are apartments with one or two rooms in Beersheva, for which tenants pay NIS 2,038 monthly.

Published by Globes, Israel business news - en.globes.co.il - on August 17, 2021