If you are looking at the Israeli housing market from the outside, it looks like absolute madness.
Prices are skyrocketing. Mortgages are massive. Interest rates are climbing. And young couples are seemingly signing away their financial freedom for a four-room apartment in Petah Tikva.
You might be asking: Why do they keep doing it?
Is it just a lack of financial literacy? Is it herd mentality? Or is there actually a rational economic engine driving this train?
Today I’m going to break down the exact reasons why Israelis continue to buy homes, regardless of the cost.
We are going to cover:
- The “Frier” Mentality and the psychology of renting.
- The math behind the “Bank of Mom and Dad.”
- Why the “Madad” scares people more than interest rates.
- The invisible hand of the Israel Land Authority.
Let’s dive right in.
1. The “Frier” Factor: The Psychology of Ownership
To understand the market, you have to understand the Israeli psyche.
In Israel, the worst thing you can be is a “Frier” (a sucker).
There is a deeply ingrained cultural belief that paying rent is “throwing money into the trash.” In many Western countries, renting is seen as a valid lifestyle choice that offers flexibility. In Israel, renting is often viewed as paying off someone else’s mortgage instead of your own.
But it goes deeper than money.
The Stability Deficit Israel does not have a regulated, long-term rental market like Germany or New York.
- Most leases are for 12 months.
- Landlords can (and do) raise the rent significantly every year.
- A landlord can decide to sell the apartment or move their daughter in, giving you two months to vacate.
For a family with kids in school, this instability is a nightmare. Buying a home—even with a crushing mortgage—buys you the certainty that you won’t have to switch your child’s kindergarten next year.
2. The Supply Bottleneck (It’s Not Just a Buzzword)
You mentioned “Supply and Demand.” Let’s look at why the supply side is so broken.
Israel is effectively an “island economy.” It cannot expand its borders. Furthermore, the vast majority of the population wants to live in the “Gush Dan” (the Central District surrounding Tel Aviv) for jobs and infrastructure.
The Land Monopoly Here is a crazy stat: Roughly 93% of the land in Israel is owned by the state (managed by the Israel Land Authority).
The government releases land for construction slowly. They control the drip. This scarcity keeps land prices artificially high. Even if a developer wants to build cheap housing, the cost of the dirt underneath the building is astronomical.
The Demographics Israel has the highest fertility rate in the OECD.
- More babies are born.
- Jewish immigration (Aliyah) continues to bring new residents.
- Divorce rates increase the need for separate households.
We have a situation where the number of households being created every year consistently outpaces the number of keys being handed over by contractors.
3. The “Bank of Mom and Dad”
You asked how the “younger generation” affords this. The short answer? They often don’t.
At least, not alone.
In Israel, buying a home is rarely an individual financial decision; it is a multi-generational family project.
It is standard practice for parents on both sides to liquidate savings, open pension funds early, or take loans against their own paid-off properties to help their children with the down payment (known in Hebrew as “Hon Atzmi”).
The Wealth Transfer The older generation, who bought homes when they were cheap 30 years ago, have massive equity. They view helping their children buy a home not as a gift, but as a parental duty.
So, while the mortgage looks huge on paper, the “equity” injection from the family lowers the risk for the bank, keeping the machine running.
4. The Mortgage Math: Why Interest Isn’t The Only Metric
You mentioned that borrowers end up paying 60-80% in interest. That is true.
However, Israelis look at the alternative: Rent Inflation.
Let’s say you decide not to buy. You rent. In 20 years, your rent will likely have doubled or tripled due to inflation and demand. You will have zero equity.
If you buy, your monthly payment is high, but a portion of that payment is forced savings (principal). Plus, in Israel, real estate has historically been a hedge against inflation.
The Linkage (Madad) Many Israeli mortgages are linked to the CPI (Consumer Price Index), or “Madad.”
- The Risk: If inflation goes up, your remaining loan balance goes up.
- The Reward: These tracks often start with lower monthly payments, allowing young couples to enter the market now rather than waiting until they are 40.
5. No Other Place for Money
Where else should an Israeli put their money?
- The Stock Market: Viewed by many traditional Israelis as a casino.
- Savings Accounts: Offer negligible interest compared to real inflation.
- Real Estate: Tangible. Physical. You can see it.
For many, a second apartment is their pension plan. There is a massive tax incentive structure (though it is tightening) that has encouraged people to treat apartments as savings bonds made of concrete.
6. The “Start-Up Nation” Salary Gap
While the average salary in Israel might not justify these home prices, the median is skewed by the High-Tech sector.
Israel has a massive concentration of tech workers earning global-standard salaries. These earners drive up prices in the center of the country. When a Google engineer and a Cyber Security expert get married, they can afford a 4 million shekel mortgage.
This pulls the average price up, forcing everyone else (teachers, social workers, etc.) to leverage themselves to the hilt just to stay in the same city.
The Bottom Line
You asked why this “madness” continues.
It continues because in Israel, Real Estate is not just a financial asset. It is a survival strategy.
Israelis buy because they fear being left behind. They buy because renting offers zero security. They buy because history has taught them that waiting for prices to drop is a losing strategy.
Is it sustainable? That is the billion-shekel question. But as long as the population grows and the land supply stays fixed, the “madness” is actually a rational reaction to an extreme market.
