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The report was astonishing. According to figures from the Central Bureau of Statistics, Israeli home prices not only didn't decline in the first quarter of 2009, even though property continued to slump in the crisis-stricken markets of the west. No. Here in Israel, apartment prices actually rose by an average of nearly 5%.

Even though indicators had shown the Israeli home market was not about to crash, the first-quarter figures were an eye-opener. They certainly had that effect on people lurking in the wings, hoping to buy a home when the prices plunged. The report triggered a surge in demand for housing among those frustrated buyers, as they gave up the dream of a cheap domicile. It is entirely possible that home prices continued to amble upward in the second quarter too - the figures should be in soon.

Of course, a serpent could be lurking in this Israeli real estate Eden. The thing is, not only did prices rise in the first quarter, they reached their highest point in two years.

In other words, the Israeli real estate market has shown itself not only to be more resilient than those of Europe and North America, but prices have continued to rise as if nothing out of the ordinary happened.

Even during the last quarter of 2008, when worldwide panic was far more intense than it is now, and pundits vied to compare the situation with the Great Depression of 1929 (though not all agreed), and competed in guessing how many years the rebound would take - even then home prices in Israel retreated by only about 3%. Most people had expected a much greater drop.

Naturally, Israel was not spared; the crisis did not pass over us. But the global predicament and the fears it sparked were reflected mainly in the dramatic decrease in the number of deals made during the last quarter of 2008, not in prices.

According to the Finance Ministry's State Revenue Administration, during that period the number of residential apartments sold in Israel dropped by 43% compared to the last quarter of 2007.

The revenue administration's reports also show that the slowdown in home-buying persisted in the first quarter of 2009, especially for luxury apartments and homes bought for investment purposes. In April the decrease flattened somewhat. Yet despite the recent upsurge in demand, the local real estate market is still shrunken compared to last year, in terms of deal flow.

According to the survey, 91,000 homes changed hands in 2008, down 6% from 2007.

The purchase of new (as opposed to second-hand) apartments dropped by 14% in 2008 compared with the year before, to just 19,000.

The beat goes up

While the world writhed in crisis and investors quivered in fear, while home and commercial property prices plunged by double-digit percentages in the great capitals of the world - over here, the price of an average apartment reached NIS 802,900 in the first quarter of 2009, from NIS 766,300 in the final quarter of 2008.

An average Tel Aviv apartment went for NIS 1,283,000 last quarter, a 5% increase compared to the last quarter of 2008.

The price of a Jerusalem apartment rose 3%, to average NIS 1,128,000.

The biggest jump in price, 9.3%, was in the seaside mountain city of Haifa, where homeowners had long despaired of seeing a recovery. At this of all times, prices jumped.

In the Sharon region, by contrast, prices inched down by an average of 0.5%, to NIS 1,015,000.

Looking closer, we find that the uptrend isn't uniform. For instance, prices of large apartments, which means 4.5 to 5 rooms, in the highest-demand area - central Israel - actually fell in the first quarter.

The biggest drop was in large Tel Aviv apartments: The average plunged by 16.4% to NIS 2,087,000. The price of similar apartments decreased by 3.2% in Jerusalem, by 4% in the greater Tel Aviv area (Gush Dan) and by 6.4% in the Sharon.

Yet again Haifa stood out for more than its scenery: The cost of large apartments rose by 3% to NIS 1,149,000.

Mirror image of America

"In many ways, the Israeli market is the inverse of the American one," says Bernard Raskin, director of RE/MAX Israel. "The U.S. has finished a decade of flourishing real estate, while nothing much happened in the Israeli market. Bubbles, in any case, didn't develop here."

But precisely because prices didn't budge much in the last decade, developers greatly reduced the scope of their construction, Raskin says. Building starts are now at a low.

Also, some of Israel's biggest developers lost their pants and then some in the international marketplace, he adds. During the boom years they invested heavily in property in America, Russia, throughout Europe - including the high-risk markets of central and eastern Europe, and even in India and Asia. Succor for building starts in Israel isn't going to come from them, Raskin says.

"Then there is the state of Israeli banking, which is like the situation in Canada in terms of stability. Israeli banks were very conservative in their approach to mortgages, so that a crisis like the sub-prime one couldn't have occurred here," he says.

Assets for investment

His next point is more technical. "Israeli banks don't use the non-recourse method. If you take out a mortgage, you have to pay the entire debt back to the bank, even if it exceeds the value of the property you bought. As a result of all these factors, few speculators have invested in Israeli real estate, and most of the market is individuals buying residential apartments for themselves, which greatly reduces the chances of a sharp drop in prices."

For an investment, Raskin recommends two- to three-room apartments, whose construction all but ceased some 30 years ago, since contractors now prefer to build larger, more expensive flats. There is a shortage of such properties, and the market for tenants is large.

Although the apartment market has been largely unaffected by the crisis, one part has registered the global dips: luxury properties, mainly in central Jerusalem and in certain Tel Aviv high-rises, where prices reached millions of dollars. Many of these apartments were purchased by foreign buyers and local businessmen, who made a fortune in the global financial markets.

The crash in late 2008 caused both demand and prices to drop sharply. Luxury apartments in Tel Aviv, whose prices peaked at an average of $5,000-$7,000 per square meter in late 2007, are now going for only $3,000-$5,000 per square meter, not much more than regular apartments in the same area. Many real estate sources believe such properties are priced attractively right now, and do not expect prices to go much lower.

Many of these apartments are located in Tel Aviv's Tzameret Park, a project that drew many investors during the peak years of 2005 to 2007. In 2008, especially in the last quarter, these investors suffered losses and began selling their apartments for considerably lower prices.

"In the last quarter of 2008 the entire market was depressed due to fears about the world crisis, and then prices fell considerably. Recently we've seen matters stabilizing, and occasionally there are even little increases," says Yossi Sionov, owner of Home Land realty, which operates at Tzameret Park. A four-room (three-bedroom), 150-square-meter apartment recently was purchased by a family for $615,000, or $4,100 per square meter. As noted above, this is essentially the price of a regular northern Tel Aviv apartment. The difference is that living in a luxury high-rise also involves a monthly maintenance fee of about $3 per square meter, five times more than that of a regular apartment.

Real estate? Not so rosy

What about office space? That is an entirely different matter, since the crisis has been all to palpable for that part of the real estate market. The office buildings that house financial companies, high-tech companies and their various service providers - lawyers, accountants, architects and other members of the liberal professions - were drastically affected by the global collapse. In an attempt to cut overhead, companies are vacating high-rise properties they used to rent for $30 and even $40 per square meter, and new tenants are not moving in.

Large-scale office projects with building permits in hand have been frozen throughout Gush Dan. Others were frozen in the planning stage, and yet others were halted after bank financing was arranged, or after initial excavation had begun.

All this is a result of the crisis, which caused a dramatic drop in rent prices. They have continued to plummet since September, decreasing by 30% to 40% if not more. Monthly rent at luxury office high-rises in Tel Aviv and Ramat Gan has dropped from NIS 100-120 per square meter to NIS 60-80. In other places the situation is much worse.

Office rents are not as low as they were after the high-tech bubble popped in 2003-2004, when offices in Tel Aviv were going for $10-$12 per square meter. The current situation is more reminiscent of 2005-2006. There are, however, some pessimistic predictions that prices will indeed hit the low reached five years ago.

"The drop in prices is the symptom, not the problem," says real estate appraiser Yaron Spector. "The problem is that there is no demand for offices right now. The demand has vanished. In office buildings, unlike in residential properties, owners have to lower prices quickly. They have to rent at any cost, or else they will immediately find themselves saddled with heavy maintenance costs and city taxes, around NIS 30,000 to NIS 35,000 a month for every 1,000 square meters. The damage is enormous."

Spector says he would not be surprised if prices continue to drop, reaching as little as NIS 40-50 per square meter, the 2003-2004 prices. "The moment there is no demand, owners fight for tenants and try to lure them away from their old offices with bargain prices. I think that the next years will be problematic, unless we see a change."

Jacky Mukmel, managing director of M.A.N Properties, which represents C.B. Richard Ellis in Israel, believes we are witnessing a slowdown, not a halt. "Building doesn't exactly stop, but we do see it slowing. Entrepreneurs work with smaller teams, and there is no motivation to finish on schedule," he says.

Mukmel disagrees with Spector's prediction of more price drops. The clampdown on new projects is actually a positive development, since it halts the drop in rent prices, he says.

"The projects that were supposed to start in 2009 were frozen, and this will lessen the pressure in 2010-2011. New buildings are not going on the market and not creating a supply surplus. I believe the recession is now at its peak. The empty spaces will fill up over the next two years, and when the economy improves, we'll see prices climb beyond what they were before the crisis."