TEL AVIV (JTA) -- Soon after Leora’s second child was born and she and her husband began looking for a larger home, Israel's new real estate reality smacked them in the face.
Though the couple had bought a two-bedroom apartment in Tel Aviv six years earlier that had appreciated to $650,000, more than triple what they paid, they still found themselves priced out of the local market. One apartment in a basement underneath a parking lot was listed at $468,000.
They are now planning to move to the coastal town of Pardes Hanna, about an hour's drive north of Tel Aviv, where prices also have climbed significantly but where they can still find a house with a garden for the same price as the apartments they saw in Tel Aviv.
"Ordinary, hard-working people cannot live in the city, and when they do they sacrifice a lot to be here," said Leora, who asked that her real name not be used. "It also feels so out of touch with political realities here: Where does it cost a half-million dollars to be a prime target for nuclear weapons controlled by a madman?"
Israel has become a leader in the global real estate market, with prices soaring in double-digit rates in recent years, particularly in the densely populated center of the country that includes Tel Aviv and Jerusalem. Last year the average price for owner-occupied homes in the country rose more than 16 percent, according to official statistics -- a marked contrast to the gloomy straits of the international housing market, particularly in the United States.
In 2010, the average home price in Tel Aviv was approximately $449,200 and approximately $398,200 in Jerusalem. Haifa showed the most significant increase, with a leap of 20 percent in one year, according to government figures.
But with the high prices have come a great challenge for families seeking affordable housing in major urban centers. Although there are great income disparities, the average Israeli family earns about $2,000 per month.
"The affordability on the demand side is almost unbearable, and this has been consistent for almost two years now," said Danny Ben-Shahar, a real estate expert in the department of architecture and urban planning at the Technion-Israel Institute of Technology. “We cannot maintain prices as high as they are now because of the affordability effects.”
The soaring housing prices also have sparked fears that Israel is in the midst of a housing bubble.
In the interests of stabilizing the housing market, the government has begun taking steps to cool it. The Bank of Israel is raising interest rates and minimum mortgage down payments to 30 percent. The government has pledged to build additional housing to increase supply. And the Knesset has approved several changes in real estate tax laws aimed at curbing investor demand.
Shay Lipman, a real estate analyst at IBI Ltd., an investment house in Tel Aviv, says the state’s ownership of 92 percent of Israel's land is a major factor in the housing shortage.
"Although the government says it will release more land for building, it tends not to happen and so there is nothing to change the amount of demand," Lipman said. "I don't see prices dropping even though it has become very difficult for young couples to buy homes."
Foreign buyers of real estate in Israel, particularly Diaspora Jews from the United States, England and France, have helped fuel demand and lifted prices, especially in the luxury market. In the past they tended to buy almost exclusively in Jerusalem, but in the past few years more have been buying up real estate in cosmopolitan Tel Aviv.
Israelis, too, are buying. In Israel, a country approximately the size of New Jersey, real estate long has been considered a safe investment. And with the world economic downturn wreaking havoc with stock markets, local investors have poured even more money into real estate.
"People here hate renting, even though rent in Israel is quite cheap while buying homes is very expensive,” said Zvi Wiener, an economics professor at Jerusalem’s Hebrew University. “There is no culture of investing in financial markets. It's considered instable. And so people have a tendency to overinvest in real estate."
Chaim Kaufman, a veteran real estate agent whose offices in central Tel Aviv face Rabin Square, sees the deeply rooted desire to buy apartments as part of the culture in Israel. Some 70 percent of Israelis own their homes, a relatively high figure compared with other nations.
"Historically, Jews were wanderers and so there is this need among people here to buy,” said Kaufman, formerly the president of the real estate brokers association in Israel.“
“Often you will see relatives and parents contributing money so adult children can buy a home," he said. "As for the Diaspora Jews, buying here gives them the feeling that they are being good Zionists and helping Israel.”
It’s also helped themselves, he noted.
“Real estate here,” Kaufman said, “has proven itself to be an exceptional investment."
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