Israeli Housing Back in Fashion as Buyers Give Up Hope of Price Drop

Government steps will take years to kick in, and meanwhile, builders held firm and refused to compromise much on price

It would seem that after a protracted slump in sales, buyers are returning to the housing market.

The year 2011 had been marked by a statistically significant downturn in sales. Transactions were all but nonexistent during the last quarter of 2011.

After a few years of steep gains in central Israeli cities, why would buyers think prices would retreat, anyway? One reason is the state of the global economy. Israel came out of the serial crises in the last few years pretty well. But inevitably, the weaker the global economy, the more it must impact Israel through depressed demand for Israeli products. The worse the economic situation in Israel, goes the logic, the more home prices are likely to drop.

But the more significant reason had been the growing awareness of the Israeli consumer, as evident in last summer’s cost-of-living protests.

The high cost of housing in Israel was a key driver of the protest movement. As tents popped up like mushrooms on city squares and tree-lined plazas up and down the land, Jerusalem scrambled for ideas, such as freeing more land for development. But by the nature of things, solutions addressing the supply-side of the housing market will take a long time to impact pricing.

The upshot is that sellers sat tight and the side to break was the buyers.

To a greater or lesser extent, the statistics of recovering sales dovetail with quarterly data that the Finance Ministry will shortly be publishing.

The Finance Ministry’s report says the number of transactions closed during the first quarter of 2012 (involving new and second-hand apartments) rose by about 20 percent compared with the previous quarter. Builders also reported an increase in the number of deals, saying they discerned an increase in the number of young couples buying homes. Transaction volumes haven't reached the heights starting in mid-2009, which ended after a year. But the state of the market has dispelled fears of a serious slump, as happened in 2002 and 2003.

What happened during the first quarter of 2012 to bring homebuyers back? Not much. The government continued to natter about future steps designed to accelerate planning procedures and increase the supply of rental housing. The state has stepped up the sale of land for housing development, but that won't impact the market for years. Nor do minor interest rate cuts explain the trend change.

It seems the only explanation is that Israelis have stopped hoping that the cost-of-living protests would lower housing prices, or that the government lavish subsidies on the people.

Many people demanded that the government reduce property taxes and adopt the principle of "affordable housing" according to the European model. But the measures that the government adopted are modest in their price goals. The state doesn't want housing prices to plunge. It doesn't want the property market to collapse. A drop of 10 percent to 15 percent is plenty, in its view.

Even though home prices are still far from the government’s stated goal, in recent interviews Prime Minister Benjamin Netanyahu has spoken of housing as a matter that has been resolved. While it is true that housing starts are up, prices have dipped by single-digit percentage points if at all in most areas. So apparently buyers decided to settle for the small discounts and financing assistance that contractors currently provide.