Ba’al Turim Street in Jaffa. The central area is becoming a focus of investment.
Ba’al Turim Street in Jaffa. The central area is becoming a focus of investment. Photo by David Bachar
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Daniel  Bar-On
Emek Refa’im Street. For NIS 8 million, you get 140 square meters. Photo by Daniel Bar-On
Ilan Assayag
Hatzionut Street in Ashdod. Builders have no fears about jacking up prices. Photo by Ilan Assayag
Ofer Vaknin
Nahmani Street in Lev Ha’ir. A 60-square-meter unit will set you back about NIS 1.6 million. Photo by Ofer Vaknin

Whence the Israeli real estate market? That's anybody's guess, but what can be said is that 2011 housing prices peaked and subsequently began to pull back. The million-dunam question is whether this downtrend will continue, where it will be most marked and when it will stop.

Once a year TheMarker checks the pulse of the market in 16 cities, consulting with dozens of realtors, brokers and other experts. This year the prevailing forecast for the next 12 months (until next Passover ) seems to be that prices will hold steady, but that the deal flow will be low. Buyers will hold off, hoping for a further drop in pricing, and sellers will hold off, hoping that prices will recover.

While buyers and sellers hunker down and contractors tear their hair, the Bank of Israel and Finance Ministry have been vying over the credit for lowering housing prices. The central bank claims its moves to raise the cost of mortgage lending (for the banks, which roll over the favor onto borrowers ), and raising interest rates, are responsible for cooling the bubbling real estate market. The Finance Ministry says buyers can thank it for releasing land for development.

Both claims ring rather false, though the central bank's sounds more credible. But it also lowered interest rates again this year - and still the public didn't storm the market for housing. This puts a hole in the theory about affecting housing prices by hiking interest rate. Mechanical economic theories such as "interest rate hike kills demand, interest rate cut spurs demand" don't really explain the state of Israel's real estate market today.

As for the Finance Ministry increasing the supply of land for development, if that has any effect on housing prices at all, it will be years down the line. What matters in the here and now is the supply constraint in the here and now - not weed-choked lots to be developed in the future.

A more likely reason housing prices have slid back from their recent peak is that they passed affordable levels, just as augmented consumer awareness was taking wing. Another is the Finance Ministry moves to discourage buying homes for investment (not for dwelling, however ). The number of people buying apartments for investment has declined sharply; also, owners of homes bought for investment purposes are trying to dump them before year-end, to take advantage of a tax break that expires at the end of 2012.

Both elements will remain in force in the next 12 months. The forecast? A lot less transactions. The luxury-housing market will probably be the worst hit, if not necessarily in the heart of the high-end housing market: Jerusalem.

But don't expect to find bargains for a fraction of peak prices. If prices do continue to fall, in general, it probably won't be by more than single-digit percent.

Israel never did develop a U.S.-style real estate bubble. The existing inventory of housing can easily be diminished should contractors sit on land rather than develop it; also, in the background, the Bank of Israel and treasury are hardly likely to sit around while the real estate market collapses.

TheMarker will be looking this week and next at the biggest cities in Israel and analyzing the state of the market in each. Today we present Tel Aviv, Jerusalem and Ashdod.

Tel Aviv / Searching for diamonds in the rough

The recent two-and-half-year Tel Aviv real estate boom has come to a screeching halt as the number of transactions have plummeted in the city's more desirable, central neighborhoods. These are defined as being located more or less in the area south of the Yarkon River, bounded in the west by Allenby Street and in the east by Begin Road. But any anticipation of substantial bargains here has come to naught: Prices have remained stable or declined only slightly.

Properties maintained their value in the area referred to as the "city center": the square mile centered around Dizengoff and Ben Yehuda streets, stretching north to Ben-Gurion Boulevard. Two-room units here range from NIS 1.4 million to NIS 1.7 million, depending on location and condition, while three-room units range from NIS 2.0 million in buildings lacking an elevator and private parking, to NIS 2.7 million in buildings featuring these amenities. Four-room apartments start at NIS 3.0 million, reaching NIS 3.5 million or more for digs with an elevator and parking spot.

Lev Ha'ir ("heart of the city" ) just to the south is no less pricey. A 60-square-meter unit here will set you back about NIS 1.6 million, with brand-new, three-room apartments going for around NIS 2.5 million. In the vicinity of trendy Sheinkin Street prices are even higher: NIS 2.65 for three-room units. The housing supply in this quarter is limited, buyers are choosy, and prices are sticky.

A somewhat greater supply of investment opportunities can be found around the fringes of these highly desirable areas. Several housing clusters south of Rothschild Boulevard have been showing signs of revival. The area around Hasharon Garden, colloquially known as Gan Hahashmal, has seen prices remaining steady and even climbing slightly in the past year, whereas three-room apartments on Lavontin and Mikveh Israel streets cost NIS 1.6 million to NIS 1.7 million, and new two-room units go for around NIS 1.4 million. The streets just south of Begin Road, in the vicinity of the old central bus station, feature newly built, two-room apartments for NIS 1.0 million and older homes from 10% to 20% less.

Prices in the Florentin quarter have maintained their peak levels reached last year. While new two-room units here average NIS 1.3 million and 60-square-meter, three-room apartments cost around NIS 1.5 million, the latter can be still found for about NIS 200,000 less in the northern part of the neighborhood, near the Levinsky Street spice market. It seems, however, that the fashionable areas around Rothschild Boulevard and Florentin are edging toward each other and may eventually become a unified expanse of gentrification.

A similar trend of heightened activity around a high-demand neighborhood that has exhausted its potential can also be seen in Jaffa. Along with its flea market, where prices had been rising for years, the center of Jaffa around Yehuda Hayamit Street is now shaping up as an appealing focus of investment. Prices here are about NIS 1.0 million for a two-room apartment and about NIS 1.3 million for a four-room unit.

Southward, along the route of the light rail which is now under construction, is Jaffa's Dalet quarter - a poor neighborhood bordering on Bat Yam where real estate operators anticipate a revival. A two-room unit there with 40 square meters that are expandable to 55 square meters can be purchased for NIS 650,000; three-room units are priced at NIS 800,000.

The real estate market in the northern neighborhoods at the opposite end of the city has gone through a difficult 12 months. Like the city center, these areas have seen a drastic drop in activity, and prices have actually fallen by as much as 5%.

In Old Ramat Aviv a four-room apartment now fetches between NIS 2.1 million for a fixer-upper, to NIS 2.4 million for a renovated unit in an elevator building. A new five-room apartment in the neighborhood costs NIS 2.7 million.

Four-room units in Azorei Chen cost NIS 2.6 million to NIS 2.7 million. Five-room units with 150 square meters of floor space here go for NIS 3.2 million to NIS 3.4 million, while in adjacent New Ramat Aviv Gimmel they cost around NIS 3.5 million.

The city's northeast neighborhoods also saw some price erosion of several percentage points for some properties. In northern Tel Baruch it costs approximately NIS 2.0 million for a three-room apartment, NIS 2.4 million to NIS 2.5 million for a four-room unit, and NIS 2.8 million to NIS 2.9 million for five rooms.

Prices for some detached homes in the northeast suffered even sharper drops of up to 10%. Houses situated on a quarter-dunam plot of land in Ramat Hahayal currently fetch NIS 4.5 million to NIS 5.5 million. Lots in the area are valued at NIS 10,000 to NIS 11,000 per square meter, while land in the older part of Tel Baruch costs around 10% more. In the Ganei Tzahala, Ramot Tzahala and Revivim sections - characterized by single-family homes on small plots - new houses in good condition cost up to NIS 4.4 million; those requiring intensive repairs can be bought for NIS 3.3 million.

The only place in the area where prices have gone up, by about 5%, is the lower-class neighborhood of Neve Sharett, where four-room apartments now typically cost about NIS 1.6 million. Market sources say prices here weren't affected by the economic crisis or protests there as they were already quite low in comparison with adjoining areas.

Prices in Hadar Yosef remained steady over the past year and three-room apartments in older buildings there cost between NIS 1.5 million and NIS 1.6 million. Properties in the more centrally located, upscale Bavli neighborhood - where three-room units of 80 square meters are priced at NIS 2.4 million to NIS 2.6 million - also maintained their value.

Real estate activity in the eastern section of Tel Aviv, where prices have remained stable this past year, has been absorbing some of the slack from the slowdown in the city's central and northern areas. The Bitzaron neighborhood has been attracting attention lately as a desirable location for young families: Small 60-square-meter houses with the option of expansion are being sold for NIS 1.6 million to NIS 1.75 million, and new five-room apartments in the neighborhood go for NIS 2.5 million to NIS 2.6 million. A younger population is also moving into nearby Ramat Israel where a 75-square-meter, three-and-a-half room apartment unit can be bought for just NIS 1.25 million. The northern end of Yad Eliahu, just south of Bitzaron, has three-room apartments of about 60 square meters going for NIS 1.2 million.

Ashdod / Still bucking the trend

Can one say that the social-justice protests, which centered around the high cost of housing in the country, didn't affect Ashdod at all? Certainly not as far as housing prices are concerned.

After months of stagnation following the protests last summer and autumn, it's back to business as usual in Ashdod. Not only is the volume of transactions in the seaside city about the same as a year ago: In some neighborhoods, prices have been rising.

This is the second year in a row that Ashdod has bucked the national trend as far as the housing market is concerned. Seeing the demand, builders there have no fear of jacking up prices.

A year ago the Israel Lands Administration sold property for development in Ashdod, for a lot of money: It demanded - and received - about NIS 560,000 per apartment. The price seemed excessive at the time and real estate market sources complained it would boost the price of housing in the city, in general. Four-room apartments would start at NIS 1.5 million, they predicted.

Even so, the units sold. If prices for four-room apartments started at NIS 1.5 million, now builders such as Abu Yehiel, the Donitz brothers and Y.H. Dimri are asking for NIS 1.65 million.

One reason prices didn't drop is the scarcity of land for development in Ashdod; while that's also true of Jerusalem, for instance, Ashdod is by the sea. It's also been working on its attraction factor with the erection of a new cultural center and parks.

In the city center, four-room apartments are going for NIS 1.25 million on average, unchanged from 12 months ago. A three-room unit can be had for NIS 930,000 - up from about NIS 890,000 a year ago. Beyond the city center, however, prices haven't changed either.

If there's been a decline in price, it's in the less desirable neighborhoods in the city's north, where a three-room apartment (no elevator ) averages NIS 650,000, down from NIS 750,000 a year ago. But in the primarily Haredi areas of the city, prices have inched up: A three-room apartment will go now for about NIS 750,000, compared with NIS 700,000 last year

Jerusalem / Ultra-high-end housing proves resilient

Price levels may have receded throughout much of Israel during the last 12 months, but not in Jerusalem's market for high-end housing.

It is true that the number of transactions has fallen in the last year by about 20%, according to real estate market sources. Also, in the less desirable neighborhoods on the city's outskirts, prices dropped by about 10%. But four transactions that went down in January drive home the point that the capital city has unique offerings - and that there is always someone who can afford them.

Two apartments were sold at the Waldorf Astoria complex for NIS 8-9 million each. Near the Foreign Ministry complex at the entrance to the city an apartment was sold for NIS 6.3 million. The fourth deal, for a 140-square-meter apartment in the German Colony, was for NIS 8 million. That's about NIS 60,000 per square meter. In all four cases the sellers got the price they wanted.

But brokers report that closing deals for more than NIS 4 million has become tougher than it used to be. Most of the buyers for such properties are nonresidents, and grim times for the world economy are not conducive to deal-making.

Sellers of cheaper properties in the city center are getting what they want. A four-room apartment in the Greek Colony went for NIS 2 million, and a two-room apartment in Sha'arei Hesed was sold for NIS 1.9 million. These are the same price levels as a year ago.

If the housing-cost protests had an impact, it was on the Jerusalem outskirts: Kiryat Yovel, Gilo, Har Homa, Pisgat Ze'ev and the Katamonim. There prices generally fell back two years in time, by up to 10%.

A three-room, 75-square meter apartment in Armon Hanatziv went for NIS 920,000, down from NIS 1 million a year ago. A four-room apartment in French Hill sold for NIS 1.3 million; a year ago the seller could have gotten NIS 1.3 million.

Contractors noticed the changes in the market and have been amending their plans. Some lowered prices 5% to 10%.

If there's a sector more affected than others, it's high-end housing for Haredim in Jerusalem. Asset prices shrank by about 15%. Apartments some 150 square meters in area in Mekor Baruch are selling for about NIS 2.4 million, compared with NIS 2.7 million a year ago. An 85-square-meter apartment, sold two years ago for NIS 1.85 million, was resold recently for NIS 1.7 million. Again the reason is the steep increase during previous years, to levels that proved unsustainable in these times.

Despite the drop, housing in the capital, including in the Haredi neighborhoods, is beyond the means of most young families. They have all but disappeared from the Jerusalemite real estate scene and have little choice but to live elsewhere.