Back in 2004 Jews from all corners of the world seemed in a rush to set up a haven for themselves in the Holy Land. A sudden wave of property purchases broke the 1,000-a-quarter mark that year, five times the rate just two years earlier. The next year the rate hit its peak at 1,350 a quarter, a pace that continued until the end of 2007 when the global economic crisis took its toll.

In hindsight the reasons behind the surge are understood somewhat differently than seven or eight years ago. Zionism and anti-Semitism may have been important factors, but there were others.

Some foreigners came to park ill-gotten funds in light of tightening oversight in Western countries, while others descended on the Israeli market after concluding that the real estate bubbles at home in the United States and Europe had run their course. Israeli property seemed cheap in comparison at the time.

There has been a sense that nonresidents have a decisive effect on Israel’s housing market even though they accounted for just 4% of all home sales between 2002 and 2012. Maybe this is because their influence has been felt mainly in the core real estate markets of Tel Aviv − where they bought 150 to 270 homes a quarter between 2005 and 2007 − and Jerusalem − where they bought 300 to 400 homes a quarter.

But concentrated in the luxury home segment, foreign-resident purchases clearly made a tremendous splash on the market. Israeli real estate had been in a rut for five years or more until then, with prices tumbling throughout the country and relatively little in the way of new construction.

Builders threw themselves at the new arrivals: In 2006, no less than 36 companies reported that at least 20% of their sales went to nonresidents.

New projects began going up exclusively for this market, with special exhibitions held in Paris, London and New York, and advertising on the Internet in English and France. Israelis weren’t barred from buying into these projects, but barely any of the marketing was ever conducted in Hebrew.

Foreign, local price gap

According to figures from the State Revenue Administration, home prices paid by foreigners between 2004 and 2011 averaged NIS 1.1 million to NIS 1.7 million, while prices paid by Israelis averaged NIS 650,000 to NIS 1.07 million − a difference of 60% to 70%. So the behavior of builders is understandable.

Chances of Israelis buying into the same projects as foreign residents were low to begin with due to the huge gap in prices. But the projects were also built in areas that Israelis didn’t find attractive, like Jerusalem’s Mamilla quarter, downtown Tel Aviv, the Ashdod’s marina and northwest Netanya.

With builders seemingly shutting Israelis out and prices starting to climb in the second half of the decade, many began feeling discriminated against. Blame was leveled at nonresidents for causing steep inreases in housing prices, but figures show that the accusation was groundless.

With foreign buyers flocking to specific projects and neighborhoods, they also drew criticism for creating “ghost neighborhoods” where masses of homes sit empty most of the year. Outstanding examples include Jerusalem’s German Colony, western Netanya, Ashdod’s marina and certain high-rises in Tel Aviv. The phenomenon was seen as an affront to local people demanding the right to affordable housing.

The issue remains a sore point even though foreign residents have slashed property purchases from a peak of 5,400 homes in 2005 to around 3,000 annually in recent years. The drop is attributed to two factors: the global economic crisis since the end of 2008 and Israel’s sharply higher real estate prices.

It may seem surprising that wealthy foreigners are now deterred by prices, but State Revenue Administration data show that while the amount paid for homes by Israelis rose an average of 33% from 2009 to 2011, prices for homes bought by foreign residents increased only 19% in the same period. Foreign residents, it seems, have drawn a line on how much they’re willing to pay.

Nonresidents have had a major effect on Tel Aviv’s real estate market, teaching Israelis a thing or two about the latest trends in urban living.

Habas ridiculed

The following is how 1 Rothschild Boulevard by the Habas Group was ridiculed six years ago in an article by Yedioth Ahronoth’s senior financial correspondent, Sever Plocker.

“There has been talk this week about another super-luxurious tower where a top apartment will cost untold millions of dollars. Where? The bottom of Tel Aviv’s Rothschild Boulevard − an inconvenient and inaccessible location lacking transportation very close to the crumbling Shalom Tower, congested Herzl Street and the noisy Carmel Market,” Potzker said at the time.

This was an opinion shared by many Israelis at the time: absolute distrust of new projects being built in downtown Tel Aviv, the type of place Israelis had been fleeing for decades.
Less than 10 years ago Israelis interested in living in Tel Aviv wanted nothing but an apartment in the city’s northern reaches. They couldn’t have imagined such a drastic change, let alone pulled it off on their own.

It took nonresidents to spark the transformation and teach Israelis a lesson from the American and European books on real estate. The benefits of living in old restored buildings in the city center, the exact opposite of the Israeli ideal ‏(until then‏) of a big house in the suburbs, was learned from Europe.

White City appeal

The process of warming up to the idea was short but bumpy, occurring simultaneously with the promotion of Tel Aviv’s ambitious plan for preserving the White City − the restoration of 1,000 of the 4,000 buildings built in the international style during the 1930s. The project received a boost when UNESCO declared the White City a world heritage site.

Another trend hitting Tel Aviv at that time arrived from North America: a taste for exclusive uniquely-designed residential towers. A fancy lobby covered in marble was no longer enough: The building needed its own unique branding. Thus was born the YOO Tel Aviv project in Tzameret Park by the Habas Group and the collaboration of the distinguished designer Philippe Starck.

The idea of giving the project a foreign name, even mangling the spelling, took a while to accept. “The idea was Philippe’s,” says Herzl Habas, CEO of Habas Group. “The intention of the name YOO is like a wink: saying ‘it’s all about you’ while giving it its own meaning and not being satisfied with just a mere word.”

The twin YOO towers, standing out with their rounded shape, also made a significant change in Israeli architecture, which had been geared toward producing box-shaped towers.