Jerusalem- Will Terror Tarnish the Golden City?

How long can a strong real estate market endure?  How high can it go?  Will the bubble ever burst?  These questions have been the main dilemma for Jerusalem buyers and sellers for the last 8 years in the Israeli real estate market.

The recent wave of terror has brought these questions to the forefront once again.  Many buyers, especially in areas that have experienced the stabbings and terror incidents have decided to reconsider the neighborhoods they want to purchase in.  Areas that border Arab villages have become less desirable, and areas such as Har Homa, Katamonim and Kiryat Yovel have seen much more activity due to their distance from sensitive neighborhoods.  Although there was a significant slowdown in the economy in 2014, the boost of 2015 gave Israelis more buying power, and young families became significant players in the market, upgrading their living conditions from 3 to 4 and 4 – 5 rooms.  Coupled with higher incomes and attractive mortgage rates, young Israeli buyers ventured into the real estate market without hesitation, and seemingly not caring whether prices were going to continue to rise or not.  The new generation of buyers only knows “a rising market” and has never experienced a declining market.  These buyers are therefore buying properties today with the anticipation that property prices will continue to rise tomorrow. This illusion which creates a “fear factor” among buyers, and helps perpetuate the rising spiral of prices.

Combine the buying frenzy with the lack of available land in Jerusalem, and we see a phenomenon that will likely continue indefinitely. The only solution to spiraling prices is the addition of more apartments in the marketplace that are compatible with the needs of young, first-time homebuyers.  This will only happen when more land is allocated for residential building and when the bureaucratic red tape is reduced so that builders are free to build faster and more effectively.  Another factor that will create more housing in Jerusalem is the creation of new zoning and building laws allowing additions on existing apartment buildings.

The entire neighborhood of Rehavia, for example, has been granted certain building additions to already existing properties in order to encourage larger apartments, create “secure rooms“ and add balconies to existing properties.  This zoning change will also afford some buildings the opportunity to add entire floors onto existing buildings, creating many more available apartments in the area.

The “Tama 38”  building initiative in Jerusalem has also picked up momentum . The plan acknowledges the earthquake risk posed to buildings constructed before 1980, and offers a very attractive solution.  Building residents could reinforce a building’s foundations, add elevators, improve infrastructure and increase the size of their apartments all while increasing the value of their homes.  The government would exempt these additions from taxes that are normally associated with expansion projects.  In Jerusalem, most projects permit as many as two additional floors to the existing building, which allows current owners in the building to profit from the sale of these units.  The building must also undergo “rehabilitation“ and earthquake reinforcement. Each apartment is granted the ability to build a secure room (as large as 8-12 sqm), enforce the foundations to sustain earthquake force tremors, add an elevator to the building, and sometimes add balconies to the existing apartments as well.

The ease of approval for a “Tama 38” plan is a different story.  According to a report by the Ministry of Interior, new TAMA 38 requests began very slowly, and approvals in the beginning were few and far between.  Today, the permits have become much easier to obtain and the process has also become easier and much more efficient.  Construction companies have realized the profitability of these projects, and many now specialize in this specific area, and have become experts dealing with the municipalities and receiving permits to qualify for the program.  Many condo committees are hiring these companies to determine if their building will qualify for the additions, since there are specific qualificationa necessary in order to receive a permit.  The building process itself can take 18- 36 months, and during the construction period, building residents must live with dust, noise and inconvenience until the project is completed.  Some owners decide to move out and rent elsewhere throughout the construction process.

According to the statistics,  Israel’s economy expanded by 2.8% during the whole year of 2014, a slowdown from previous years’ expansion of 3.2% in 2013,  3% in 2012, 4.2% in 2011, and 5.7% in 2010, according to the IMF.  The Bank of Israel saw approximately 3.2% GDP expansion in 2015 and expects 3.5% in 2016.  In March 2015, the country’s unemployment rate was only 5.3%, according to CBS, compared to 5.9% in 2014.

Apartment prices in Israel rose 0.9% just in July 2015 according to the Home Prices Index after rising 1.2% in June, the Central Bureau of Statistics reports. Home prices rose a total of 6% in the 12 months ending in July 2015.

Since the start of 2015, home prices have risen 5.2%, figures that are backed up by data from the Ministry of Finance, which show a substantial rise in the number of deals, and data from the Bank of Israel showing record levels of buyers taking mortgages.

In July 2015, Finance Minister Moshe Kahlon decided to raise the purchase tax for buyers purchasing second homes as investments, and this pushed investors and vacation home buyers into the market before the hike was implemented.  Many realtors and builders reported a “buying frenzy’ in the last two weeks of July, when investors needed to close purchases in order to take advantage of the lower tax, saving some buyers tens of thousands of shekels.  This purchase tax applied to foreign buyers as well, so contracts that were lingering suddenly rushed to close before the July 31st deadline.

Following the tax Increase, with the purchase tax increased to 8%, the market started to see a steep drop in the proportion of new apartments purchased by luxury home buyers and the small investor apartment as well.  While new apartments accounted for 35% of all apartments purchased by investors during the first five months of the year, this number fell to 20% in August.  The proportion of apartments purchased for residential purposes went up 0.6% during this period, but this increase only partly compensated for the steep drop in purchases of new apartments by investors.

With the new wave of terror throughout Europe, and fear from extremists worldwide, many European and American Jews have started inquiring about smaller, 2 and 3 bedroom apartments they want to purchase ‘just in case’.  These buyers usually rent the properties out for the time being until they decide to come to Israel on a permanent basis.  Although these buyers are aware that the return on investment (ROI) is usually only about 3.5- 4.5% in Jerusalem, they believe the appreciation value will more than make up for the lower return, assuming the real estate market continues to rise in the future.

So, to answer the original question, “Will terror tarnish the Golden City?”– Absolutely not.  Jerusalem will always have a unique spiritual drawing power, and even with the Tama program and zoning expansions, the population increase and spiraling demand for apartments in the city will continue to outweigh the supply.  As a realtor in this city for over 20 years, I have only seen the market dip once, and that was during the second Intifada of from 2002-04.  So, barring WWIII, I think it’s safe to say that an investment in real estate in Jerusalem is a wise decision and a “golden opportunity” !

This article was written by Alyssa Friedland, Broker/Owner of the RE/MAX Vision Real Estate office in Jerusalem with over 20 years of experience in real estate. She offers free consultation to all New Olim and potential buyers.  Her office has over 25 agents covering almost every Jerusalem neighborhood, and she can refer buyers to an agent in any area of Israel.

For more information: call 02-673-4111 or 054-668-4111, or go to the office’s internet site (www.remax-capital.com).