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Bank of Israel sees no drop in home prices

The Bank of Israel does not foresee any fall in home prices, while rents are expected to rise, according to the bank's Financial Stability Report for the second half of 2021. The report says that the slowdown in land sales by the Israel Land Authority in 2020 will result in a decline in construction in the coming years. This very much reduces the chances of a fall in prices in the near future. Furthermore, the report says, the slow rise in rents so far while home prices have risen makes it likely that a rise in rents is not far away.

The bank's analysis shows that the coronavirus pandemic has had a fairly small effect on the housing market. Building starts were down 1.3% in 2020 in comparison with 2019, but rose by 4.5% in the first nine months of last year in comparison with the corresponding period in 2020. Building starts were running at 56,100 annually, a number that could be revised upwards, as the rate at which building permits were issued was higher. 

The central bank points out that some of the land that the Israel Land Authority sold in 2021 was subject to restrictions and that construction on it cannot begin immediately. It also points out that prices in Israel Land Authority tenders rose from 2020 to the time that the new government was formed and the state budget was passed, even in areas not considered high-demand areas. "The rise in land prices is liable to lead to a rise in home prices in the future," the report says.

On the gap between the pace of home price rises and that of the rise in rents, the report says, "This gap can be closed by a fall in home prices or by a rise in rents. A rise in rents seems to be the likely scenario in the short term."

In its analysis, the Bank of Israel mentions the termination of the Buyer Price program, which gave home buyers much greater discounts than the discount of up to NIS 300,000 in the Target Price program that replaced it. "The rise in home prices will make it impossible for households that cannot accumulate enough equity or meet mortgage repayments to buy homes, and so the demand for rentals will rise," the report states.

Another factor mentioned by the report is that the rental return on investment properties has fallen sharply, especially in high-demand areas. This, it says, will spur investors to try to raise rents.

Published by Globes, Israel business news - en.globes.co.il - on February 14, 2022.