Housing prices in Israel have been steadily rising for several years, but why exactly is this happening? Global influences, economic trends, and government policy ultimately boil down to the two most important concepts in the free market – demand and supply. High demand and low supply will raise real estate prices and vice versa.
If so, what affects demand?
Interest : One of the main factors affecting the demand for real estate is the interest rate. Low interest rates lead to two processes. On the one hand, the interest accrued on our bank deposits becomes meaningless, and on the other hand, low interest rates improve the terms of mortgage payments. These two processes make real estate a more attractive investment avenue and increase demand. The low interest rate in the economy is one of the main reasons for the increase in housing prices in Israel over the past decade.
Demographic change : Demographic change also has an impact on demand. Such a change can occur as a result of global economic trends, such as the population's shift to the suburbs in the 1950s due to increasing urban density and the emergence of private vehicles, or a return to the cities as seen in recent years. One of the best examples of the impact of demographic change on demand occurred in Israel during the 1990s with the immigration of hundreds of thousands of new immigrants from the Soviet Union, which led to tremendous demand in the real estate market.
And what affects the supply?
Government decisions : Government policy has a direct impact on supply in the real estate market. Remember the housing crisis in the 1990s? In order to respond to the large wave of immigration, the then Minister of Housing, the late Ariel Sharon, decided to promote various plans to increase supply in the market, such as waiving planning procedures and providing incentives to developers, which led to a solution to the housing crisis of those years.
In recent years, programs such as the Price for a New Homeowner have been established, which was supposed to make it easier for young families to purchase their first home and increase the supply of apartments. The approval of the national outline plans known as TAMA 38 to strengthen existing buildings against earthquakes led to urban renewal processes in many cities in Israel and greatly affected the supply on the market.
Local Planning and Committee Activities : Another factor that affects the supply of real estate is the master plan (MRP) that regulates land use in the territories of Israel. The Planning and Building Committees are responsible for the master plans. The local committee can recommend to the district committee outline plans that are within its authority and approve building permits in accordance with the master plans that have already been approved by the district committee. They can also grant various concessions in building lines or the number of housing units, and so on. There is no doubt that the decisions made by these committees significantly affect the supply in the real estate market.
Construction components : Ultimately, the supply of real estate depends on the availability and costs of all the components needed for the construction industry. Until the outbreak of the first intifada in the late 1980s, Palestinian workers were considered a cheap and reliable workforce, and when the closures on the territories began, a different solution was needed and migrant workers from countries such as China and Romania began arriving in Israel with work visas.
The Ministry of Construction and Housing decides on the quota of foreign workers in the construction industry based on various considerations, and as the workforce grows, more can be built and supply can be increased. In the same way, cement costs also have an impact on supply. In recent years, the construction industry has begun importing cement from Turkey at very low costs, which has made it easier to increase the supply of apartments. However, since importing cement could endanger the cement industry in Israel, the Knesset Finance Committee decided on a dumping levy on cement imports that could ultimately lead to a reduction in supply.
And how does all this affect the real estate market?
Let's say I want to sell my apartment for two million shekels. I know that interest rates are low now and it will be easier for my buyers to get a mortgage, but my buyer is actually considering buying an apartment off the paper in a new project being built in a nearby neighborhood. If the supply is greater, I might have to lower the price to 1.8 million shekels. Do you understand the formula? Where supply meets demand – that's where prices are set, and that's how the price of the apartment is determined!
