By Shia Getter

Time and time again I hear people remarking that the real estate market in Israel is on the decline for one reason or another. Even now, with the series of legislation aimed at price control, real estate in central Israel shows no signs of dropping.

This is a simple supply versus demand equation. When demand is higher than supply, prices rise. And certain areas always remain in high demand. Prices don’t fall in London’s West End or in Los Angeles. The same rule is at work for Jerusalem, Tel Aviv, and Bet Shemesh, too.

Supply Isn’t Due
To Catch Up With Demand

For example, 268 new homes were sold in Jerusalem alone in February 2014. All the signs of strong demand are present, yet supply is not catching up–causing an increase in the value and price of all apartments available on the market.

New legislation announced in March 2013 but only due to take effect in September (at the earliest) has put a damper on supply. According to the Israeli Contractors Association, the construction industry may be held up by 20%–about 8,000 residential units–as contractors sit and wait for the new construction criteria to be published.

Let’s take a leap to the year 2035. In line with the trends and on the basis of data analyzed in August 2013, CBS estimates that about a million more Israeli households will have emerged by then. So if the next 20 years continue along the same graph as the last 20 years, we’ll reach a staggering shortage of 111,000 units. Unless construction in Israel shifts into turbo, it’s quite clear that the gap between need and availability will only grow wider.

The obvious question remains: how many residential units must be built per year in order to narrow this gap? To accommodate for CBS’s estimated population expansion, an average of 45,500 new residential units must be constructed annually. Yet last month, the government’s housing program approved a yearly construction volume of only 40-45,000 units. Note that approval for construction is nothing more than approval; not all of these units will necessarily be built. To pull out of “overdraft,” stay in proportion with the needs of the people, and ensure a surplus supply of apartments, at least 50,000 units per year are required.

Lack Of Land In Jerusalem

The Holy City is very near built to capacity. There just isn’t much land left. Going back to our supply and demand model, this means that the price of new housing will only rise in the long run.

The green movement managed to get the government to cancel the Safdie Plan, which would have added 20,000 apartments on the western hills of Jerusalem. Now those empty plots of land have been deemed untouchable.

In addition, there is the issue of “controversial” land–land that is part of Jerusalem, yet located “over the Green Line.” For this reason, areas like Ramat Shlomo have experienced political difficulties and setbacks in their potential expansion. Again, with such scarce land available for new construction in Jerusalem, it is no wonder that the price paid for housing is on the rise.

Israeli Bureaucracy
And Government Approvals For New Housing

If you read the newspaper, all of the encouraging headlines about government approvals for new buildings may have you furrowing your brow in confusion at this seemingly conflicting data. Yes, 72,000 apartments were approved in 2013, and 6,909 of them are in Jerusalem. This is a 200% increase over 2010 approvals. Yet these numbers are a smokescreen for reality on the ground.

After a permit is granted for new construction, the Israeli bureaucratic process can take up to 13 years until bulldozers break ground and the structure takes solid shape. According to data publicized in the summer of 2013 by Dr. Karnit Flug, then deputy governor of the Bank of Israel, the planning committee takes five to eight years after the building permit is received. Construction then lasts two and a half years, with an additional six months dedicated to marketing. So the next time headlines exclaim boldly about approval for thousands of new apartments, take a deep breath…and don’t hold it while you wait for construction to start.

Israel’s Tax Revenue

Another point to consider if you are still concerned that real estate will drop, is that Israel’s tax revenue from real estate in 2011, for example, was 5.89 billion shekels. The government certainly has no intention of jeopardizing this income. The ILA (Israel Lands Authority) sets a minimum price on their land tenders, canceling the sale of the land to contractors if no contractor steps up with the predetermined minimum price. Such policy keeps the real estate market rising, both by jacking up contractors’ expenses and by holding back available land from the market for about six months each time, until they can get their price.

Demand for housing is blazing into the future, yet supply trails way behind. Ï–

Shia Getter is the CEO of the Shia Getter Group, a full-range real estate services firm in Jerusalem catering to the Anglo investor. He is a noted expert, columnist, and author of The Guide to Investing in Jerusalem Real Estate. He and his professional team manage many upscale Jerusalem properties and have helped countless people buy, sell, and renovate property in Israel. Look out for more of his articles in the coming weeks.

NOTE: This article is Shia Getter’s market analysis and should in no way be construed as advice to buy or sell property. This article is intended to provide general information about the subject matter covered. It is not meant to provide legal opinions, offer advice, or serve as a substitute for advice by licensed, legal professionals.


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