Five Factors That Affect Real Estate Prices

Plans for Route 531, one of the main feeder roads to the Trans-Israel Highway, include a section along the city's southern outskirts that is liable to seriously damage property values nearby. Ra'anana property owners have discovered to their horror that despite the steady price increases and the demand throughout the city, it's risky to invest in properties along Route 531. So it's no wonder that over the past year there have been many calls by Ra'anana residents for Route 531 to be built as a tunnel.

The city's predicament was discussed recently at the economic department of Ehud Hameiri & Co., a land assessment and economic consulting firm. The department conducted a feasibility study of real estate investments in various parts of Israel. This research revealed a few main factors that could affect future price trends.

Most of these factors are out of the hands of the property owner, such as the changing security situation, new construction plans, the overall economy and even demand from foreign residents. Some of the factors can boost an apartment's price, while others can drag it down by dozens of percentage points.

The feasibility study sought to identify the factors that could harm an apartment's value.

The first factor is the construction of roads and national infrastructure projects. The study found that while new roads, such as those that connect the Trans-Israel Highway to the other two major north-south highways (Route 4 and Route 2), are likely to increase property values in nearby communities, residential properties right next to the new roads are likely to suffer from the noise and air pollution.

The second factor is ground pollution. Some enormous new projects are currently planned for places such as the former Israel Military Industries compound in Ramat Hasharon, the Pi Glilot compound and the IMI compound on Derech Shalom in Tel Aviv.

Until recently the general public had little awareness of ground pollution, but the more the plans for these areas progress, the greater the public's awareness. Since scientific information in this field is not readily available, the investing public's reactions to environmental matters are also affected by psychological factors such as the aversion to cellular antennae.

Hameiri researchers contend that property values near ground pollution will decline, at least until the actual situation is clarified. CEO Gilad Hameiri notes that environmental awareness is very developed abroad, where, for example, banks demand information on ground pollution risks in the area surrounding residential apartments that serve as security for mortgages.

A third factor, Hameiri says, is the spike in demand wherever the train system and railroads are upgraded. In general, the connection of a town to a rail line contributes to the town's development, thanks to improved access, resulting in increased property demand, which pushes prices up accordingly. On the other hand, such infrastructure development can also draw demand away from some communities due to competition from other communities.

Hameiri's study uses Holon, Rishon Letzion and Petah Tikva as examples, as these cities have been enjoying brisk demand in recent years thanks to the construction of new, modern neighborhoods and their proximity to Tel Aviv.

Even so, Hameiri notes that in the near future Modi'in will be hooked up to the rail system, providing better and faster access to central Tel Aviv, and this could divert demand from the cities north and south of Tel Aviv to Modi'in, a new city with expansion plans and prices that are still relatively low. As a result, prices in certain neighborhoods in Holon, Rishon Letzion and Petah Tikva might be affected.

The fourth factor is demand from foreign residents. According to Hameiri's study, prices in a certain sector of properties, mainly luxury apartments in north Tel Aviv and downtown Jerusalem, are significantly influenced by demand from foreigners. As more of them come, more developers build luxury projects to meet the demand.

Hameiri stresses that a risk analysis in such an investment must include a differentiation between demand from Israeli citizens upgrading their homes and demand from foreign residents. Demand from the latter stems partially from comparisons to alternatives elsewhere in the world. At least some of the demand from foreign residents can be attributed to the changing trends such as "real estate in Tel Aviv today, office space in Shanghai tomorrow."

So it's hard to predict how long the current trend will continue, and this puts Israeli buyers at risk, as they may already be paying excessive prices for luxury properties in Tel Aviv.

The fifth factor is the security situation. The escalation of hostilities in the Gaza Strip and the regular bombardment of surrounding Israeli communities have raised fears of a similar situation developing in other parts of the country, such as Ashkelon's southern neighborhoods.

An example of this can be provided by property owners in the expansion neighborhoods in Israel's north. The Second Lebanon War erupted when sales in those areas were in full swing and prices had risen. With the outbreak of the war, real estate activity ground to a halt and only recently, almost a year after the war, are property owners able to breathe easily and begin to report a reasonable level of sales.