How will the Israeli real estate market react to the ongoing economic and security upheavals in the country? Will prices continue to fall due to high interest rates, or will the trend reverse and lead to a rise in property values?

The Impact of War and the Economic-Political Situation on Real Estate Prices

The real estate market in Israel is currently in the eye of the storm. The security situation, combined with economic and political realities, creates uncertainty and a general sense of instability that directly affects property prices. The picture is not straightforward, and forecasts reflect concerns over delays in construction on one hand, alongside incentives for buyers designed to maintain demand and sales levels on the other. This situation raises fears of a “bubble” forming, alongside a growing gap between demand levels and financing options in the market.

Uncertainty in the economy directly influences the behavior of potential buyers, particularly in areas under high security threat. Buyers tend to hesitate making significant purchases during uncertain times, which may lead to a short-term slowdown in demand. The volume of building permits may also shrink due to logistical issues and financial uncertainty faced by contractors and developers.

Against this backdrop, we will review the key trends and factors that may lead to price increases as well as those that could contribute to declines.

Potential Factors Driving Real Estate Price Increases

1. Supply Shortages vs. Stable Demand: While economic and security uncertainties may cause a freeze in demand, the basic demand for residential real estate in Israel remains high due to planning and construction limitations. Israel’s population continues to grow, and the pace of new construction struggles to meet the need for housing, creating sustained pressure that may lead to rising prices.
2.  Government Incentives and Favorable Loans: Developers sometimes receive support and concessions from the state for construction in specific areas, which helps lower building costs and reduce financial risk for developers while maintaining demand. Government incentive programs allow young couples and families to take out mortgages above the average, increasing overall demand in the real estate market.
3. Attractive Financing Conditions Fuel the Mortgage Market: Banks continue to offer variable interest rate financing options, contributing to a trend of larger loans and enabling buyers to manage higher mortgage payments and commitments. The Bank of Israel has expressed concern over “balloon loan trends and developer financing schemes” to buyers, warning that they “may distort market prices.”

Potential Factors Leading to Real Estate Price Declines

1. Low Down Payment Promotions: Developers often offer attractive promotions to maintain demand and prices, including options for down payments as low as 10–20% of the property value. This creates a false sense of market activity. In reality, buyers are only paying a deposit for an “option” to purchase the property, with the remaining payment deferred to a later date or to occupancy. Such deals allow buyers to postpone their full purchase decision and even withdraw if necessary, meaning they do not reflect genuine demand and create an artificial impression of sales activity.
2. Rising Loan Levels: The increase in loan ratios (especially relative to income) and demand for larger mortgages is a concerning trend. High loans combined with variable interest rates can place economic pressure on households. When interest rates rise, mortgage payments may increase significantly, making it harder for buyers to meet repayments. This often leads to property sales at a loss, which in turn contributes to a broader trend of falling prices.
3. Economic Slowdown and Wage Decline: Due to economic uncertainty and the security situation, many businesses are stagnating, and unemployment is rising. As a result, wage levels may fall, reducing purchasing power. A combination of rising unemployment and lower household disposable income will significantly shrink the pool of potential buyers capable of purchasing a property, weakening demand and potentially leading to lower prices.

Summary and Outlook

The real estate market is currently in a complex situation, facing high risks. Against the backdrop of Israel’s security and economic conditions, many experts estimate that the market may face a period of price declines, particularly due to growing uncertainty, rising unemployment, and concerns over the financial burden on households with large mortgages. While certain areas may see high demand due to buyers seeking safer locations, this trend is likely temporary. The market expectation is that rising interest rates and concerns over repayment capacity will continue to drive a general decline in demand, especially in areas with higher housing supply.