Israeli Finance Chief's Plan to Reduce Housing Prices Falls Short

Up to 50% of buyers of Moshe Kahlon’s reduced-price housing program for apartments end up renting instead of buying

A housing development in the Israeli city of Lod.
Ofer Vaknin

Between one-third and half of the apartments sold under Finance Minister Moshe Kahlon’s Mechir Lemishtaken reduced-price housing program are being rented out by their owners, even though the program was designed to enable first-time buyers to own their own homes.

Some 51,000 apartments have been sold and handed over to their owners under the program, at discounts of 200,000 shekels to 500,000 shekels ($54,000 to $134,000) below market price.

The phenomenon is particularly prevalent among residents of central Israel who bought a home in an outlying area.

To date, only a handful of apartments built under the program have been occupied. These include projects in Lod, Afula, Ra’anana and Dimona.

However, a review by TheMarker found that many of the owners are not finding renters interested in paying the rental prices they hoped to receive, and that those who have found renters are worried that the large number of Mechir Lemishtaken homes under construction will flood the market with rentals, thus pushing down their asset’s value.

While the sample size under review is small, the findings raise concerns as to whether the buyers will be able to pay their mortgages on these apartments.

In Afula, for instance, the project is in the city’s neglected C1 neighborhood, and monthly rental prices there are hundreds of shekels lower than in older projects in the city’s other neighborhoods.

FILE Photo: Israel's Finance Minister Moshe Kahlon
AMIR COHEN/Reuters

In Ra’anana, buyers in the project in the city’s Neveh Zemer neighborhood complain that the apartments are lacking compared to what was promised on paper, and that they need to invest significantly in order to bring them up to standards.

In general, buyers have complained that the apartments are below standard, and that they have to spend significant sums installing their own air conditioners and kitchen cabinets, among other features.

Ronen Rosenthal of the Madlan real estate research website says that in order to calculate actual returns, you also need to take into account how long it takes until the apartment keys are handed over. Buyers could wind up paying 100,000 shekels a year on their own rents while waiting for their purchased apartments to be ready, a particularly heavy burden for first-time buyers who may have mortgages equal to 90% of the apartment’s value, he notes. In addition, the apartments are concentrated in the same locations, which means no one buyer has an advantage over the market, he notes. This to pushes down prices.

Thus, in Ra’anana, buyers can expect to get annual returns of 3.69% from renting out their apartments, even though the apartments were sold at a significant discount under market prices, according to data compiled by Madlan for TheMarker.

In Afula, the rental market is being impacted by the large number of Mechir Lemishtaken apartments available, and buyers are facing returns of less than 3.5% a year.

In Lod, in comparison, the first few Mechir Lemishtaken apartments in the city’s Achisemech available for rent are bringing in a nice 6% a year, but given that another 2,500 apartments in the neighborhood are about to be handed over, buyers are likely to see rents drop drastically.

Construction in the Israeli city of Afula.
Rami Chelouche

Ohad Kronenberg, Afula’s Re/Max 770 franchise holder, compares the Mechir Lemishtaken apartment construction to a factory construction line.

The first apartments in the city were handed over to their owners a year ago, and approximately half are seeking to rent them out. As a result, dozens of apartments in the neighborhood are empty.

“Prices in the city didn’t go down, there’s just a differentiation between the Mechir Lemishtaken apartments and the free market,” says Kronenberg. “It will be hard to escape the negative stigma these homes hold. Israelis aren’t willing to pay market prices for these apartments, because they know what they’re worth. The projects are lowering the quality of construction as well as the population entering the city,” says Kronenberg.

A new four-room apartment in Afula general rents for 2,500 to 2,800 shekels, says Kronenberg, reflecting a 4% annual return for the owner. Four-room apartments built under Mechir Lemishtaken, in comparison, rent for 1,800 to 2,300 shekels, he says. Generally that would be the price of an old apartment in an old building without an elevator, he says.

The average price for four-room apartments in the C1 neighborhood is 700,000 shekels.

“The way it looks right now, people who said, ‘Let’s take this benefit, the apartment will pay for itself,’ are finding themselves at their wit’s end. Under the best-case scenario, they’ll sell for a 100,000 shekel profit as soon as they can. That’s the goal of Mechir Lemishtaken,” says Kronenberg.

Four-room apartments through Mechir Lemishtaken in Lod start at 780,000 shekels, versus 1.4 million shekels on average through the free market. Of the 3,600 apartments planned for the Achisemech neighborhood, some 2,600 are expected to house religious or ultra-Orthodox Jews. About 10% have been handed over to buyers so far.

One buyer, R., says they bought their apartment in Lod without planning to live there – he and his family plan to stay in a more secular area. His apartment, listed for rent at the beginning of the school year, received significant interest, and ultimately he signed someone for 3,600 shekels a month – returns of 6% or 7%, he says. But he acknowledges that depending how quickly the other apartments in the project are ready, demand for his apartment could either remain high – or could drop sharply.