Next Year in Jerusalem - if You Can Pay

Despite negative migration, housing prices in Jerusalem have risen sharply in the last decade.

There is no small number of differences between Tel Aviv’s housing protests and their Jerusalem counterparts. While most of Tel Aviv’s social protesters consider Mayor Ron Huldai to be one of the parties responsible for the sharp increase in housing prices in the city, their Jerusalem peers blame mostly the government and foreigners, and actually see city hall as a partner. From their perspective, the municipality has been attempting to advance rental projects and affordable housing, even if such measures have yet to offer respite from the skyrocketing prices.

In addition, even if the dynamics in the Jerusalem housing market are similar to those in Tel Aviv, the circumstances are entirely different. Jerusalem home prices have been increasing on average 3.2% a year since 1983 after adjusting for inflation, according to the Central Bureau of Statistics’ homeowner surveys. That figure is 3.5% in Tel Aviv, 1.4% in Haifa and 2.2% for Israel as a whole. Starting in 2002, the Jerusalem housing market started to simmer, and the prices of housing began rising 5.6% a year on average. The figure for Tel Aviv was 5%, for Haifa 0.8% and for Israel 3.5% then.

Do the sharp increases of the past decade mean that Jerusalem is heading for a sharp downward correction? Prices have dropped sharply there in the past: During the hyperinflation of the 1980s real home prices dropped 27%, and also dropped 15% at the beginning of the last decade. Price decreases are a distinct possibility. On the other hand, you need to be cautious when trying to use multi-year averages in order to predict the future. Unusual price changes could be the result of fluctuations in the market, plus there’s no reason to think that averages can’t change.

Another look at Jerusalem housing prices, conducted by the government’s chief appraiser, found that since the fourth quarter of 2008, the price of 4-room homes increased 35%, which makes the city close to average in national terms, but still nowhere near Haifa or Be’er Sheva, where prices increased 51% and 47%, respectively.

However, looking at Jerusalem as a single unit doesn’t tell the city’s full story. Clearly there’s a big difference between East Jerusalem − the territory adjacent to Ramallah and Bethlehem that falls within the Jerusalem municipality boundaries − and West Jerusalem. A Jewish resident has little to no chance of purchasing a home in large swaths of land within Jerusalem’s municipal borders, while other parts of town attract only ideologically motivated residents.

Another serious problem limiting homebuyers’ options is the country’s relationship with its ultra-Orthodox citizens. Some 29% of Jerusalem’s residents are ultra-Orthodox, according to the Central Bureau of Statistics, and that figure is growing. The Haredim live primarily in the northern neighborhoods, but also in the relatively new Har Homa, and they are slowly making inroads into other parts of town including Neveh Yaakov and Givat Mordechai. Secular and national-religious homebuyers generally avoid these neighborhoods, which reduces their options even further.

These factors don’t affect only residents: They also restrict city hall, and make it very difficult to spearhead the renewal of older neighborhoods, as Tel Aviv did in the cases of Sheinkin and Florentin in the 1980s and 2000, respectively. As a result, the supply of apartments effectively available to non-Haredi buyers is limited and lacking. This is a major factor that is pushing up prices.

Another serious problem facing the Jerusalem housing market is the lack of nearby satellite cities. When prices go up in Tel Aviv, buyers can start looking for homes in the city’s many neighboring towns and suburbs. However, Jerusalem has only a few such options − Ma’aleh Adumim and Mevasseret Zion are the closest suburbs; Beit Shemesh is a further away and is also undergoing Haredization, making it a less desirable option for secular and national-religious families; and from there, the nearest city is Modi’in, which isn’t really all that close.

If that weren’t enough, middle-class Israelis are competing against wealthy foreign residents when it comes to purchasing homes in central Jerusalem neighborhoods, particularly Talbieh, Rehavia and the German Colony. Prices in these areas began climbing fully a decade ago, while neighborhoods with fewer foreign residents began getting more expensive only in 2005 and 2006.

Thus, the claim that foreign residents sweeping up luxury apartments kicked off the price rises in Jerusalem in general in recent years may actually be justified. Yet foreigners can’t be blamed for the full brunt of the problem. Their purchases in the market peaked in 2006 at 13%, and under normal conditions, average Israeli homebuyers should have found other options. The lack of those in Jerusalem, however, is a real problem.

Given that the choices facing homebuyers in the city is limited to begin with, and there’s no escape in the form of satellite cities − you could say that Jerusalem is a real real estate pressure cooker. It’s one of the main places in the country where homes are in serious short supply. This is particularly notable given that the city has had negative migration − some 5,000 to 7,000 people move out of Jerusalem every year, according to the Jerusalem Institute for Israel Studies. Yet demand is still increasing, a sign that buyers’ options are truly limited.

We randomly checked neighborhoods in the capital with few foreign residents and found that while housing prices there increased sharply since 2006, they ultimately kept pace with other cities around the country. Prices in these neighborhoods increased 60% to 80% in nominal terms since 2006 ‏(not including Har Homa, where prices rose 50%; there has been a massive amount of new construction there‏). These percentages are similar to what could be found in other urban areas around the country.

Apparently the only thing keeping the Jerusalem pressure cooker from boiling over is the decreasing demand from young would-be buyers who are abandoning the city.