When, where & why to Buy Real Estate in Jerusalem
With a strong seller’s market for the past 4 years, rising prices and a shortage of apartments to satisfy the seemingly endless demand, why would or should anyone buy property in Jerusalem right now?
The real estate market in Jerusalem is experiencing an extended period of strength, with steadily rising prices. When the world financial crisis hit in 2008-09, Israel’s economy, specifically its real estate sector were mostly insulated from the difficulties experienced by most other developed countries. Thanks to conservative lending practices, the level of home forclosures has remained very low, while other countries have suffered dangerously high levels of foreclosures, which have rippled negatively throughout other sectors of their economies.
The stability of the Israeli real estate market, especially in contrast with the volatility of worldwide stock markets, has had strong appeal to investors looking to shelter their capital from more risky alternatives. The prospect of 5- 10% annual appreciation, combined with low-cost mortgages, has kept the demand for property in Israel’s capital unabated and unsated. Despite the steady increase in prices over the past 4 years.
buyers, both foreign & domestic, have continued to upgrade from smaller homes, buy starter homes for married children and buy investment homes.
Being in the business for over 18 years in Jerusalem, our office has seen both the ups and downs of the market… terror in 1998, the Inifada in 2001, and the European economic crisis in 2004. Each type of market presented its own challenges. The key is to identify the opportunities offered in each market and adapt investment strategies to maximize those opportunities. We’re enjoying the combination of strong demand exceeding supply, and incredibly affordable mortgage financing. A combination like that is hard to derail. When added to the unique character of Jerusalem, and its broad appeal to members of all the major faiths, we don’t see any factors at the present time that will change the nature of the existing market.
Even the efforts of governmental forces to ‘cool down’ the real estate market have had relatively little impact. While the pace of rising prices has slowed throughout most of the country, there are still areas, including Jerusalem, that have remained immune to those efforts. One example of such efforts is a restriction placed on the amount of financing available for the purchase of an investment property which is not the buyer’s primary residence. A similar restriction also just went into effect on January 1 of this year for foreign (non-Israeli) investors. Another effort by the Bank of Israel to cool down the real estate market was to raise bank reserve requirements for higher ‘loan-to-value’ mortgages. Theoretically, this measure was intended to reduce investor demand by making it necessary for each buyer taking a 70% loan to pay a higher interest rate on their mortgage loan (a result of the lending bank having to set aside more non-income producing reserves against such a loan). This was supposed to dampen investor demand because the investor would have to put up more personal capital for each purchase, thereby reducing his leverage to buy multiple properties. The real victims, however, are the young couples & families trying to buy their first home. They are the ones who have the most difficulty raising the additional capital needed to take a cheaper mortgage loan.
So, with all the efforts to “cool down” the market and bring down real estate prices, why is the Jerusalem real estate market still rising? Jerusalem is a unique market. Unlike other cities throughout Israel, Jerusalem has a spiritual element that draws foreign buyers from all over the world . Many foreign buyers feel that owning a home in Jerusalem connects them to their ancestors, their history and their roots , even though they do not intend to live in Jerusalem year round. Other European buyers are buying in Jerusalem to have a “haven”, in case the storm of anti-Semitism in Europe worsens, and they feel the need to flee for their safety. Whatever the motivation may be, the demand will always be high and therefore property values will continue to increase. The shortage of available land to build in the central neighborhoods of Jerusalem, perpetuates the lack of new housing available and means that the demand will always outweigh supply.
Investors have also been realizing the benefits of buying property in Jerusalem Although they are aware that prices are high in the more central and well established neighborhoods of Jerusalem, they savvy investors have found bargains in the peripheral neighborhoods such as Armon Hanatziv, French Hill and Gilo. With a high demand for rentals from young couples who cannot yet afford to buy, or students who need temporary housing, an investor can realize as much as a 9-10% ROI ( return on investment ) on short term ( vacation ) leasing or 4-5% ROI on long term rentals. Combining that with an appreciation value of up to another 5% – 10% per year, investors can realize a nice profit on their investment . Small 3 room ( appox 65 sqmt) apartments in the peripheral areas range from 1,000,000 nis to 1,200,000 nis. With a 30% down payment , and a 70% mortgage, an investor can leverage their investment and use the rental income to pay the mortgage. Property in Jerusalem was, is and always will be a good investment simply because of the basic economic fact that demand in Jerusalem always exceeds the supply. Obviously as in any market, there are highs and lows but over a 5 year or more time period one can expect a solid capital growth while enjoying a reasonably high nominal rental return. In addition many investors like the fact that they own a property in Jerusalem which may be used by themselves or family members in the future or as a holiday home.
In closing, those who have waited on the fence for the bubble to burst have been dissapointed. Those who have jumped into the market in the last few years have seen the benefits and appreciation of their properties. The Jerusalem real estate market is strong and there are no signs it will weaken, so jump in and get your feet wet… and see why all that glitters really is Golden !
By Alyssa Friedland- Broker/ Owner RE/MAX Vision
Alyssa and Roger Friedland are Broker /owners of the RE/MAX Vision office in Jerusalem with 26 agents covering all the Jerusalem neighborhoods. Contact: 02-673-1661 www.remax-capital.com
Office address: Derech Beit Lechem 41, Baka, Jerusalem