February 13 – March 13, 2025
Steady Price Increases Despite Economic Challenges
Recent reports indicate that home prices in Israel continue on an upward trajectory, climbing by an estimated 7–8% over the past year. This marks a rebound following a temporary lull in late 2023, when a regional conflict briefly dampened the market. Analysts attribute the ongoing rise in prices to several factors:
- Limited Housing Supply: Demand consistently outstrips new construction, particularly in high-demand urban areas.
- Population Growth: Steady natural growth, along with an inflow of new or returning immigrants, increases pressure on the housing stock.
- Investment Demand: Overseas investors and local buyers seeking secondary properties help keep prices elevated, despite higher purchase taxes.
Understanding Supply Constraints: A “housing shortage” generally refers to situations where the number of available homes fails to keep pace with the number of households needing them. In Israel, this disparity is exacerbated by population density in a relatively small geographic area.
Reduced Sales Activity After Year-End Rush
At the close of 2024, many buyers hurried to finalize contracts ahead of a new Value-Added Tax (VAT) increase that took effect on January 1, 2025. As a result, December’s transactions spiked, reaching one of the highest monthly sales levels in nearly three years. However, January 2025 saw a sharp drop in closings—estimates point to around 7,500 homes sold nationwide, down more than 30% from December’s heightened figures.
Preliminary data suggest that February 2025 remained sluggish, indicating the slowdown extends beyond a single month’s post-tax adjustment. Industry observers point to:
- Higher Financing Costs: Rising interest rates make mortgages less affordable.
- Cautious Buyers: After several years of intense market activity, many potential purchasers are pausing to assess economic uncertainties.
What is VAT? VAT (Value-Added Tax) is a consumption tax placed on goods and services at each stage of production or distribution. An increase in VAT directly affects the final price consumers pay for newly built homes, often causing price-sensitive buyers to move up their timelines before rate hikes take effect.
Government Measures and Their Impact
Tax Policies
- Raised VAT Rate: In an attempt to moderate the housing market, the government bumped VAT on new residential purchases from 17% to approximately 18.5% starting January 2025.
- Investment Purchase Levies: Additional taxes on buyers acquiring secondary or investment properties remain in place. The goal is to curb speculative behavior and keep prices from overheating.
Encouraging Long-Term Rentals
Officials are exploring incentives for landlords to offer multi-year leases—potentially five to ten years—instead of the standard annual contract. This effort aims to stabilize the rental market, which is largely unregulated, and offer tenants greater security in an environment of rising housing costs.
Expanding Construction Labor
In response to labor shortages that intensified during the 2023 conflict, policymakers are fast-tracking permits for a significant number of foreign workers. Laborers from countries such as China and Eastern Europe are being brought in to accelerate stalled projects. Proposals even include creating a dedicated residence zone near Modi’in (a city in central Israel) to accommodate thousands of these incoming workers.
Peripheral Development Support
To balance out growth that remains concentrated in central cities, the government is providing grants and economic incentives for people to move to—or invest in—northern and southern regions along Israel’s borders. Although these benefits are relatively modest, they indicate a sustained effort to encourage both population and economic expansion outside Tel Aviv and its surrounding suburbs.
Why Bring In Foreign Workers? Large-scale construction projects often require specialized labor and a high volume of workers. When local labor pools are insufficient—or disrupted due to regional tension—importing skilled workers helps maintain the pace of ongoing developments.
Major Construction and Renewal Projects
Urban Revitalization Efforts
Officials continue to prioritize urban renewal programs—known locally as Pinui-Binui (evacuation-reconstruction) or updates to “Tama 38” projects—to replace outdated or structurally vulnerable buildings with modernized dwellings. The goal is twofold:
- Increase Housing Stock: By adding floors or rebuilding entirely, developers can provide more units in central neighborhoods.
- Improve Safety: Many older structures in Israel were built without modern seismic standards, making reinforcement or replacement crucial.
Tama 38 Explained: Tama 38 was originally a nationwide policy enabling property owners to reinforce older structures. In many cases, additional floors were permitted as an incentive for developers to fund these projects.
Northern Redevelopment
A newly approved plan focuses on revitalizing an area in the north, aiming to attract businesses and new residents to stimulate regional growth. Local leaders hope to see both economic diversification and improved infrastructure, making northern hubs more appealing to families who might otherwise seek housing in central Israel.
Luxury Complex Near Tel Aviv
Despite the higher taxes and interest rates, a prominent development firm has launched construction on a high-end residential project just outside Tel Aviv. The investment, estimated at ₪135 million, demonstrates continued confidence in Israel’s upscale property segment.
Transit Upgrades and Their Effect
- Light Rail Expansion: Tel Aviv’s light rail began operating recently, though current ridership is only about 40% of initial forecasts. Experts anticipate ridership to grow over time, which could boost neighborhood businesses and real estate values near stations.
- Future Metro Plans: A wider metro network is in advanced planning stages. Once built, real estate professionals predict it will reshape housing demand patterns, with more affordable or outlying districts becoming viable for commuters.
Evolving Investor and Renter Trends
Foreign Buyers Return
Increased concerns about global antisemitism and a desire for a secure asset appear to be drawing overseas buyers into Israel’s real estate market. Cities with strong cultural or religious ties, such as Jerusalem, continue to attract significant interest. Many of these buyers view Israeli property as both an investment and a personal statement of connection to the country.
Domestic Investors Adjusting
Recent data suggest that investors currently represent around 15–16% of home purchases—down slightly from the flurry seen late last year. Although purchase tax surcharges discourage short-term speculation, long-term investors remain active, betting on continued market growth.
Surplus of Newly Built Homes and Regional Variations
Rising Inventory
Nationwide, the volume of unsold new apartments has grown to about 79,000 units as of early 2025—a record high. This increase hints that construction has, in some areas, outpaced immediate demand, potentially giving future buyers more choices if the trend continues.
Regional Contrasts in New Home Sales
- Tel Aviv Metropolitan Area: Sales of newly built units in Tel Aviv rose approximately 18% between November 2024 and January 2025, the highest percentage increase in the country. Still, even with this uptick, the city retains roughly 8,900 unsold units, mirroring the national surplus pattern.
- Jerusalem: In the same period, Jerusalem experienced around a 12% dip in new apartment transactions. Analysts suggest local price levels and changing household preferences have softened demand in the capital.
Rental Market and Affordability Outlook
Rising Rent Costs
In parallel with higher home prices, rent levels have also climbed. Many households opting out of ownership are pushing rental demand upward, resulting in average rent increases of around 3% for new leases compared to last year. While some coastal urban cores show slight signs of leveling off, competition remains fierce in popular neighborhoods.
Owning vs. Renting
For the first time in years, the monthly cost of mortgage payments on comparable properties can be 25–35% higher than renting. With central bank rates remaining elevated, this gap is prompting many prospective buyers to delay homeownership, thereby sustaining the pressure on rental markets.
Mixed Signals for the Months Ahead
Israel’s real estate sector finds itself in a complex period. On one hand, persistent price inflation and a record inventory of new apartments suggest a market grappling with both robust demand and possible overbuilding. On the other hand, government intervention in taxes, long-term rental incentives, and construction labor policy is shaping a new dynamic that could gradually stabilize prices or at least slow their ascent.
As of mid-March 2025, potential buyers appear increasingly cautious, while renters face steadily climbing leases. In the coming months, much will depend on how quickly new supply is absorbed, whether financing conditions ease, and whether fresh government initiatives effectively address long-standing challenges in affordability and housing distribution. For now, the overall consensus is that Israel’s real estate market remains resilient—albeit under close watch by both local and international stakeholders.
