Jerusalem: The Capital of Contradictions

The city is one of Israel’s poorest, but home prices are among the highest in the country. While buying by foreigners has tailed off, well-heeled Israelis are taking their place.

Eyal Toueg

When it comes to residential real estate, Jerusalem is a city of seemingly impossible contradictions.

It is one of Israel’s poorest cities, yet home prices are among the highest in Israel. It’s celebrated as the capital of the Jewish state and offers unprecedented cultural, entertainment and culinary opportunities, but its Arab population is growing faster than its Jewish population. And its Orthodox and ultra-Orthodox residents, who are less likely to make use of the city’s museums and restaurants, now comprise a majority of its Jewish residents. Many Diaspora Jews buy homes in the city as a refuge from growing anti-Semitism in Europe, yet Jerusalem suffers its own religious and national tensions that have led to violence, in particular over the past year.

The city’s Jewish population has undergone important transformations over the last decade. The proportion of secular residents has dropped from one-quarter to one-fifth of the population. Meanwhile, the segment of the population defined as traditional-secular and traditional-religious population now comprises just 48% of the city’s Jewish population, down from 56% 10 years ago. Religious and ultra-Orthodox Jews are now a majority.

Meanwhile, between 2008 and 2013, Jerusalem’s population grew 9.2% to 829,900, yet only 43% of the growth was among Jewish Jerusalemites even though they account for about two-thirds of the city’s population. Jerusalem’s Arab population has doubled over the last 20 years and had reached 320,300 at the end of 2012.

Perhaps the biggest paradox, as far home buyers are concerned, is the inverse relationship between the economic situation of Jerusalem’s residents and the value of their real estate.

One major reason for this is that foreign residents are such a big part of the real estate market. Anyone with the resources to buy a second home has money to spend and their calculations are more affected by economic conditions in their home country than those in Israel. In 2013-2014, Jerusalem accounted for a third of all homes purchased by foreigners in Israel.

Nevertheless, these numbers are trending downward. Over the last two years the number of home purchases by foreigners has dropped – by 19% in 2014 and 15% in 2013. Part of the decline is because 2012 saw an intensive marketing campaign for a handful of large, upscale apartment complexes that caused the number of new homes bought by foreign resident to surge to 400 that year. But another factor is that increasing numbers of foreigners are not in the category of the very wealthy seeking luxury properties. Many are making do with ordinary apartments, but that puts them into competition with middle-class Israelis with fewer financial resources.

In come the Israelis

For developers of the luxury properties sprouting up all over the city, the decline of foreign buyers hasn’t been a disaster as they tap the market of well-heeled Israelis. As a result, the number of homes costing 8 million shekels ($2 million) or more sold in Jerusalem jumped to 44 in 2013, up from 32 in 2011 and 26 in 2012.

In 2014, the number of top-of-the-market sales plunged to only 18, but developers and real estate agents are optimistic about this year’s prospects, albeit for unfortunate reasons: Terror attacks in France and Denmark over the past few months are making many European Jews nervous and they are looking for a first or second home in Israel.

Jerusalem’s unusual demography has put it out of step with the rest of the Israeli real estate scene. In the fourth quarter of 2014, as the waiting game for former Finance Minister Yair Lapid’s abortive Zero-VAT plan ended with the collapse of the Netanyahu government, the number of home sales shot up 22% nationwide, compared with the third quarter. But in Jerusalem, the market barely reacted, with sales rising just over 2.2%. Nationwide, home sales dropped 12.5% from a year ago, but in Jerusalem they plummeted 24%.

A lot of that was due to the absence of younger couples, or first-time home buyers, in Israel’s capital. After peaking at 1,700 in the last quarter of 2013, young couples bought just 900-950 homes in the final three months of last year. Part of the precipitous drop derived from the so-called “Jerusalem grant,” which the government offered to first-time home buyers in the Jerusalem area during much of 2013. Beneficiaries received between 70,000 and 95,000 shekels (roughly $17,000-$24,000). When the offer expired, the city’s real estate market turned sluggish.

A second, more fundamental blow to the market came from the Bank of Israel, which began tightening financing terms for mortgages in August 2013 by setting a ceiling of 50% of household income that can go toward mortgage payments. The central bank’s clampdown has had little effect on the pace of home sales elsewhere in Israel, but the combination of high-priced homes and low-income families has made it harder for Jerusalemites to finance a home purchase.

Still, the massive construction taking place in Jerusalem is insufficient to meet the burgeoning demand and some areas are feeling the same upward price pressure the rest of Israel is, especially in Jerusalem’s ultra-Orthodox, or Haredi, neighborhoods.

Southern luxury

The focus of Jerusalem’s luxury segment has been in the city’s older southern areas, like the German Colony, Talbieh and their immediate surroundings. The most expensive sale since Passover 2014, for instance, was an old 300-square-meter home on Rehov Harekevet, adjacent to the old railway line in the German Colony, which sold for 29.7 million shekels ($7.43 million). But downtown Jerusalem is hosting several major luxury projects and even once lower-income and poor areas, such as the Katamonim, have gotten their first upmarket residential towers.

Neighborhoods on the seam between Jewish and Arab Jerusalem, such as French Hill and Armon Hanatziv, are the areas where residents feel the national and demographic pressures most acutely. French Hill is adjacent to Mt. Scopus, home to the eastern campuses of Hebrew University and Hadassah Medical Center; it was built in the 1970s and its oldest buildings can be found on Ha’etzel and Hahaganah streets. In recent years, dozens of Arab families have purchased apartments in the neighborhood, but apartments are also popular with investors due to their relatively low prices and proximity to the university.

The price of three-room, 70-square-meter apartments in French Hill have risen by 10% in the past year and now go for 1.2-1.35 million shekels. Four-room apartments in the same buildings saw a slight price rise, reaching 1.4-1.7 million shekels. In Armon Hanatziv, prices are even lower, with three rooms of 60-70 square meters selling for 800,000-1.2 million shekels. A four-room apartment fetches 1.4-1.6 million shekels.

Arnona is a south Jerusalem neighborhood undergoing a dramatic expansion, with 600 apartments under construction on land owned previously by Kibbutz Ramat Rachel. Prices in the neighborhood have risen by several percent over the past year, so that three-room apartments now sell for 1.3-1.7 million shekels, while four-room units cost 2-2.3 million shekels.

The Katamonim is an older neighborhood consisting of mostly low two-story buildings built half a century ago. The value of apartments in the area derives mainly from its potential for urban renewal. Nevertheless, the last year saw no significant changes in prices, which range between 1.1 and 1.4 million shekels.

In the tonier neighborhoods of Rehavia and Talbieh, there is a much wider price range, depending mainly on the type of building an apartment is in, whether there is a garden, whether any upgrades were made and on the number of tenants in the building. Four-room apartments in these areas typically range between 3 million and 3.5 million shekels.

Beit Hakerem and Ramat Beit Hakerem, two of the capital’s most desirable neighborhoods, have little room for new construction. Ramat Beit Hakerem apartments fetch slightly higher prices than those in Beit Hakerem since they are newer. Nevertheless, prices did not rise much last year in either neighborhood. A four-room apartment in Beit Hakerem costs 2.2-2.5 million shekels, while in Ramat Beit Hakerem they range between 2.5 and 2.8 million shekels.

The demographic pressures of the rapidly growing ultra-Orthodox community continue to raise home prices in their neighborhoods, often significantly. Demand is far in excess of supply, but prices can vary widely even for seemingly similar properties; it all depends on the expansion rights the building has.

The Tama 38 effect

Ultra-Orthodox buyers are very aware of the benefits of the Tama 38 plan, which awards additional building rights when structures are strengthened against potential earthquakes. The problem is that little actual building has been done under the Tama 38 program, so its impact has only been to raise prices further without creating any additional housing stock.

Home prices in Ramot soared 10% last year, reaching 1.4-1.5 million shekels for three rooms and 1.6-1.9 million shekels for four rooms. The higher prices contractors are asking for in projects under construction in the area led to higher prices for older homes as well.

Ramat Eshkol saw a similar 10% increase, after demand for three-room apartments surged in expectation of a surge of Tama 38 renovations in the pipeline. Three-room homes now range between 1.8 and 2.3 million shekels, with four rooms costing between 2.4 and 2.8 million shekels. In Ramat Shlomo, prices likewise climbed 10%, reaching 1.6-1.75 million shekels for three-room apartments and 1.8-2 million shekels for four rooms.

Rising prices in the Schneller project currently underway in Romema have caused the prices of second-hand apartments in the area to surge 15%. Three-room apartments now sell for 1.6-2.1 million shekels and four rooms for 2.3-2.8 million shekels.

In contrast, apartments in Shmuel Hanavi and Mekor Baruch saw increases of only a few percentage points over the last year. Three-room properties in Mekor Baruch now cost 1.7-1.9 million shekels, while four rooms cost 2.2 -2.5 million. In Shmuel Hanavi, three rooms sell for 1.1-1.3 million shekels and four rooms go for 1.3-1.45 million.