When It Comes to Real Estate, Jerusalem Is Far From United

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Construction at Har Homa in East Jerusalem.Credit: AP

We can continue to celebrate Jerusalem Day as in the past, and continue to use the clichés such as “the city that is joined together,” as it says in Psalms. And we can assume that many, especially politicians, will continue to do so. But the changes that are brewing in Israel’s capital, at least from a real estate perspective, are moving in the opposite direction.

The city may be growing rapidly, but it is also undergoing an accelerated process of segregation into neighborhoods based on religion, nationality, and ethnicity — and the real estate market does not match these rapid demographic changes.

Jerusalem, as the largest city in Israel, has been constantly in competition with Tel Aviv for the highest number of building starts in Israel. Last year Jerusalem led with 3,432 starts compared to 1,873 in Tel Aviv. As for completing construction, Jerusalem is the hands down winner: 7,351 new housing units were completed in the capital between 2010 to 2013, compared to only 6,614 in Tel Aviv. About 5% of all the new units in Israel were built in Jerusalem during that period.

This momentum will continue in the short term because the local planning and building committee issued last year 2,668 building permits for new housing units, and the Israel Lands Authority sold the land for hundreds more units, mostly in the neighborhoods of Pisgat Ze’ev, Har Homa, Ramat Shlomo and Ramot.

But even this amount of construction is not adequate to meet the growing demographic demands. From 2008 to 2012 the number of residents in Jerusalem grew from 760,000 to 815,000 - an additional 55,000 people. Most of the gain came in the Arab community, with a 32,000 person gain over the four year period. The Jewish population grew by only 23,000.

Over the past 20 years, the Arab population of the capital doubled and reached 312,000 by the end of 2012. This figure has both local and national implications, and the government tends not to mention it — maybe because it is uncomfortable to remember that almost 40% of the residents of the eternal capital city of the Jewish people are Palestinians.

It is also uncomfortable for many to deal with the reality among the Jewish population, which has also undergone major changes over the past decade: The percentage of secular Jews has fallen over the past decade from a quarter to a fifth. Observant Jews and religiously-inclined Jews are becoming a minority, down to 48% of the population from 56% a decade ago.

The percentage of more strictly religious and ultra-Orthodox Jews has grown from 44% to 52% in that period. It is impossible to overstate the significance of this data. It can stand alone to explain the negative growth of and migration from the city by nonreligious residents — as well as the general lack of interest that most of the Israeli public shows toward the capital.

Only 14% of homes were built in ultra-Orthodox neighborhoods

These changes have great significance for the real estate market, since someone looking to buy an apartment in the capital quickly finds how all this data on the supply of housing is only theoretical and irrelevant. There is a huge discrepancy between the theoretical supply of homes and the real supply on offer, since just as no Arab family views the western part of the city as a place they’d live, nonreligious and religious Zionist families would never consider the Haredi neighborhoods as a realistic possibility for buying a home.

“The housing supply in Jerusalem is segmented, and in practice we look at Jerusalem as three different cities, and the relations among the populations are not symmetric,” said Yair Assaf-Shapira of the Jerusalem Institute for Israel Studies. “In places where the Haredi population moves in, we non-Haredi populations express reservations about locating there.”

“In comparison, the Haredi community prefers to live in Haredi areas, but it can also live in non-Haredi areas, and from research we have conducted [we have learned that] it stems mostly from a lack of choice. The Arab population is concentrated in the eastern part of the city, and almost never moves west,” said Assaf-Shapira.

While there may seem to be a lot of construction going on in the capital, it is still not enough given the demographic needs. Examining the construction by sector shows it is not proportional to the needs of the different groups. Only 14% of the units built from 2010 to 2013 were in Haredi neighborhoods, according to the Jerusalem Institute. 39% was built in secular or observant Jewish neighborhoods, and only a fifth was in mixed neighborhoods. The construction for the Arab community made up only a quarter of all new construction.

“In the eastern part of the city there is a range of illegal construction, though recently we have become aware of an increase in legal construction, which requires the issuing of building permits. It is possible that this is happening as part of an ‘Israelization’ trend that we see among [the Arab] population, which is showing a rise in requests for [Israeli citizenships],” said Assaf-Shapira.

Still not accurate numbers

But the figures above do not express the true supply of homes in Jerusalem. One sector of the capital’s real estate market stands out as very lively — which is a problem for those looking for apartments — and that is why it Jerusalem was one of the main centers for the social protests that broke out in 2011. The exception to the rule in the real estate market is luxury residences in the center of town, which are mostly targeted at foreigners.

Ten years ago, this market focused mostly on the neighborhoods of Rehavia and Talbiyeh near the center of town, where there are also single family homes. Jerusalem developers, who understood the scope of the new demand, started building even more luxurious projects in recent years, and these units are not at all relevant for the local population. These properties still interest the foreigners, mostly wealthy Jews. Evidence of this change is in the number of sales of units costing at least 8 million shekels ($2.3 million), which rose to 36 in 2013, compared with 26 in 2012.

The latest pet project for foreign buyers is the brand-new Waldorf Astoria Hotel, which also has condominiums for sale, on the corner of Agron and King David streets. The project includes the 230 room hotel as well as the residential building, and over the past four years 17 units have been sold at prices from 8 million shekels to 40 million.

It also turns out that things have changed in the “ghost neighborhoods” — traditionally areas with a lot foreigners owning vacation homes. It used to be the owners only spent their holidays in the country, leaving the units empty the rest of the time. Assaf-Shapira says these units are slowly being filled up all year long, though proper research on the matter has not been done. “Preliminary assessments are that some of the residents are new immigrants from rich countries. In addition, it turns out that in these neighborhoods there are those who are residing in Israel with tourist visas rather than [Israeli] identity cards, and therefore they do not appear in the official statistics,” he said.

The difference in prices with Tel Aviv is holding steady

It seems the steady rise in prices that characterized the Jerusalem real estate market in recent years has become more moderate, and 2013 was the second year with no significant price increases for the cost of average apartments in the capital - while in many other places prices continued to climb.

On average, an apartment in Jerusalem is about 35% cheaper than in Tel Aviv, and this gap has remained much the same since 2008. By comparison, in 2008, a Jerusalem home was 81% more expensive than in Haifa — but in 2013 it was only 47% more expensive.

The cities around Jerusalem, such as Modi’in and Ma’ale Adumim, where many Jerusalemites move when they leave — have continued to show rising prices. The difference between the prices in Jerusalem and Modi’in has narrowed for the third year in a row. An apartment in Jerusalem was 55% more expensive than a similar one in Ma’ale Adumim in 2011, but only 42% more costly in 2013. The numbers for Modi’in show Jerusalem homes as 29% more expensive in 2010, compared to only 17% more last year. And if we look only at second hand apartments, the gap narrows even further: only 10% for Modi’in and 38% for Ma’ale Adumim. The differences in prices between Jerusalem and the new Haredi satellite cities, such as Beitar Ilit and Modi’in Ilit, is even greater, though that gap too is shrinking.

The Jerusalem Institute says that the large differences in price between the capital and its satellite cities was one of the major reasons that led people to move out to the newer towns, but now the gaps are narrowing, this should affect the rate of outward migration.

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