Real Estate 2016

In Housing the Public Thinks Big While the Government Thinks Small

More units of three rooms or less are being built even though data show Israelis prefer roomier alternatives.

Shikun Hamizrah in Rishon Letzion.
Ofer Vaknin

Over the years Israelis have been building and buying ever-bigger homes. But as prices climb rapidly and the government tries to meet demand by accelerating construction, is small starting to look more enticing?

The answer is not straight forward. The latest data from the Central Bureau of Statistics for 2015 show an increase in purchases of smaller three-rooms apartments, but only in the new-homes market in which contractors are building smaller units. In second-hand homes — which constitute most of the market — the trend has been just the opposite, with a sharp drop in the purchase of apartments with three rooms or less.

Last year the number of construction starts for homes of one-to-three rooms jumped to 4,665, nearly double the 2,502 in 2014 when the number reached a record low. In the 1990s houses of three rooms or less accounted for about a fifth of all new residential construction but by 2014 its share had fallen to well below 10%. Last year it edged up to 9.7% as the overall pace of construction grew.

One reason for the growth of construction of small apartments is a controversial rule that requires local authorities to build a minimum number of apartments of three rooms or less over the next five years. The idea was to create housing for families struggling to pay the price of a larger home.

The local authorities have protested the rule, which takes away their authority to decide how many housing units can be built in any single project. But it also has aroused criticism because it flies in the face of the growing Israeli preference for bigger homes. Small starters homes for young couples will simply force them to re-enter the market as their families grow, saddling them with extra costs. Better to lock in a bigger property now, the reasoning goes.

Unsurprisingly, high-cost, high-density Tel Aviv is the capital of the three-room apartment. Last year construction began on 667 units of three rooms, a 21% increase from 2014. In Jerusalem, three-room starts grew to 579 last year from 151 and in Ramat Gan to 367 from 298.

Contractors have particular clientele in mind in the biggest cities – investors who plan to rent them to young couples and students, young couples who want the city but can’t dream of anything bigger and older couples downsizing after their grown-up children have left home, as well as singles and divorcees.

But the three-room-apartment phenomenon has spread to places where the demographics are very different. In Beit Shemesh, a town of Orthodox and ultra-Orthodox families, no three-room units were built in 2014, but last year construction on 244 units was begun. Likewise in the seaside town of Netanya, where the smallest apartments under construction in 2014 were four rooms, but where, in 2015, 244 three-room units were started.

Sharon Ben-Zvi, vice president for marketing at developer Meshulam Levinstein Group, says the great downsizing of the Israeli market reflects real buyer demand. “Smaller apartments are very much in demand and in rapidly developing areas that attract lots of young couples. If that’s the situation, we have to adapt our projects to the buyers in the community where we’re building,” she says.

But it’s not so simple. According to figures from the Housing and Construction Ministry, the number of units of one to three rooms sold by builders reached an eight-year high in 2015, but in the second-hand market, the number was the lowest in eight years. Overall, because the second-hand market is so much larger, Israelis have been shunning smaller homes. Whatever preference there is for smaller units isn’t a matter of taste but the unfortunate economics of high home prices.

But the government seems determined to foist smaller apartments on an unwilling public. The fast-track planning committees are giving priority to smaller apartments as is the government’s flagship program, Machir L’Mishtaken (Target Pricing).