Rental Prices Surge as Housing Prices Fall in Israel

Israeli rental prices have been on the rise, marking a significant shift in the country’s real estate landscape. The Central Bureau of Statistics (CBS) reported Thursday that housing prices have experienced a steady decline over the last four months, amounting to a cumulative decrease of 1.3%. However, when factoring in the impact of a 4% annual inflation rate, the erosion of housing affordability becomes even more pronounced.

Conversely, the CBS notes that rental rates have been steadily increasing, signaling a reversal of the trend seen in previous years when rents lagged behind rising housing prices. The housing services index, reflecting changes in rental prices, indicates a 4% rise during the first eight months of 2023, following a 6.2% increase in 2022.

An analysis of listings on the Yad2 ads site conducted by Globes underscores this upward trajectory in rental costs. Specifically, the rent sought for three-room apartments has surged by an average of approximately 13% nationwide over the past year. This analysis covers a peak market period during the summer, when students search for rental apartments before the academic year commences.

At a national level, average rents in August 2023 surged by 12.7% compared to August 2022, a substantial increase in contrast to the 6.3% rise observed in the previous year. Three-room apartment rental ads increased by 5.5% during this period, contrasting with a 16.4% decline in such ads between August 2021 and August 2022. Additionally, the number of ad views increased by 2.4% over the past year, following a 7.6% decrease in the preceding year.

Regional disparities are evident in rental trends, with some cities experiencing more pronounced changes. Leading the rise in three-room apartment rents are Hazor HaGalilit (monthly rent of NIS 2,582), up 16%, Migdal Hamek (NIS 2,395), also up 16%, Givat Ze’ev (NIS 4,064), up 13%, and Yokneam (NIS 2,980), also up 13% over the past year. However, these towns typically have limited rental markets, resulting in more extreme fluctuations.

In Tel Aviv, rental prices for three-room apartments increased by a relatively moderate 5.6% over the past year, amounting to about NIS 350, with an average rent of NIS 6,574. This moderation is attributed to a substantial 25% increase in rents during the previous year. Nonetheless, over the past two years, the average rent for a three-room apartment in Tel Aviv has surged by 32%.

Yerushalayim witnessed a 7% increase in monthly rents over the past year, averaging NIS 5,037. Over the same two-year period, rents in the city climbed by 18%.

In Haifa, monthly rents increased by 6% in the past year, reaching NIS 3,260, following a 9% rise in 2022. However, Haifa has experienced a significant 54% drop in the number of rental ads on Yad2 over the past two years. Nevertheless, a steady number of ad views suggests that demand has remained stable.

Notably, Netanya has seen an exceptional 20% increase in rents for three-room apartments over the past two years, reaching NIS 4,307 per month. Similar to Tel Aviv, most of these increases were recorded in 2022.

Conversely, Be’er Sheva stands out for its rental stability, with monthly rents for three-room apartments rising by just 3.5% over the past two years to NIS 2,500 per month, including a mere 1.5% increase over the past year.

The rental market in Israel has entered a paradoxical phase since the beginning of 2022. Despite rising rental prices, landlords are experiencing diminishing returns due to various factors, including rising interest rates over the past 18 months.

The Israeli rental market involves three major players: tenants, investors, and the government, all contributing directly or indirectly to rising rents. However, none of them, including investors, are reaping significant benefits from the current situation.

Investors have historically based their rental income on apartment prices and associated costs, including financing expenses, changes in property value, and monthly rent received, all of which determine their annual return. In recent years, the focus for investors has primarily been on the soaring prices of apartments, with rental yields receiving less attention.

However, the landscape has shifted recently. The reliance on price increases alone is no longer sustainable, as apartment prices have started to decline, and financing costs have significantly risen due to interest rate hikes. This has eroded net yields for investors. Additionally, investment alternatives have become more attractive, offering better returns through secure banking channels.

Tenants also contribute to rising rents, as there has been a 40% decrease in the number of apartments purchased over the past year. This decline is partly attributed to the steep increase in interest rates, making apartment purchases unaffordable for many. Consequently, those who intended to buy are forced to rent, while new entrants into the rental market further escalate demand, putting upward pressure on rents.

The government is a significant player in the market and aims to reduce the presence of investors in the rental market, primarily through high purchase taxes, equivalent to almost three years’ worth of rental income. The rationale behind this policy is to curb investor activity, which is perceived as driving up prices and hindering young couples from accessing affordable housing.

Meanwhile, property owners have increasingly opted to exit the rental market due to unprofitable returns, investing instead in alternative options, including foreign real estate. Finance Ministry data indicates that over the past seven years, over 30,000 apartments have been withdrawn from the rental inventory. This supply shortage further drives up rents.

While the government has pledged to create a large-scale long-term rental market, interest rate fluctuations have hindered progress, resulting in land auctions often failing and construction rates failing to compensate for the dwindling supply of rental apartments.