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SMS Projects > Articles > 2010 – The Year when the Trend will Turn

2010 – The Year when the Trend will Turn

The end of 2009 also marks the end of the upswing in real estate prices.  With the peak behind us, 2010 looks like it will be a year of changing trends with an expected price reduction of 5% in peripheral areas.  In the areas of high demand, the buying groups will continue to set the tone, while the demand for offices in the center will increase toward the end of the year

By: Yoram Kraus, CEO, SMS Project Management
When isolating the Israeli real estate market and looking back to early 2009, it is hard to believe that the year started with one of the worst economic crises ever experienced by the world.  "Standstill" was a key word at the time when relating to global markets and, naturally and as expected, the real estate industry around the world stood even more still than any other field.  Investments ceased, projects were terminated and there were no new financers in site.  When the waves of the economic tsunami reached Israel in 2009, the upcoming year was expected to be a dry year as related to construction beginning and new real estate projects.  The secondhand transaction market also tapered down in expectation – the buyers expecting a decline in prices and the sellers seeking signs of recovery.

However, all of this related to the first quarter of 2009.  Until then, the real estate market in Israel followed the trend in the global markets, i.e. stopped.  However, the difference between the demand and supply of apartments in Israel, reflecting a constant shortage of about 15,000 apartments every year, had its way.  According to figures from the Central Bureau of Statistics, the demand for apartments in Israel reached about 40,000 per year, as compared to 25,000 construction beginnings every year.  This difference propelled the real estate market into a live and kicking course, where quite a few transactions were finalized and the prices even increased by an average of about 10% - mostly felt in the market for small apartments in the large city.  This trend, along with the growing preference for new apartments over secondhand apartments, detached the Israeli real estate market from the global crisis and it managed to survive until the end of the year.
When attempting forecast the real estate market in 2010, one can already point to several parameters that may mark future trends in the upcoming year.

First, in the battle of next year's forecasts, between Bank of Israel Commissioner Stanley Fisher and Minister of Housing Ariel Attias, the former predicts a continued increase in real estate prices in 2010 and a severe problem in the real estate market, while the Minister of Housing announced a plan to save the housing industry in Israel, releasing lands and stating that as early as Q1/10, the increase in apartment prices will end and we will even begin to feel a decline.  In this duel of announcements and forecasts, there seems to be a draw at the moment, i.e. there is a certain freeze on prices, leading to their stabilization, with a tendency toward 5% price reductions outside of the Dan region.
Another parameter, which has a direct impact on the real estate market, is the interest rate in the economy, which recently increased to 1%.  This increase will soon reach the mortgage market and render apartment acquisitions more expensive and, although the interest rate is still low, there is no guarantee that it will stop at 1%.

Even foreign residents, who were a substantial factor leading to the price increases, mainly of the luxury apartments in Tel Aviv and Jerusalem, are no longer teeming to buy a home in Israel.  The economic crisis severely reduced their financial stability and when they decide to enter into an investment, they examine every penny and are unwilling to pay any price.
All of these clearly reflect a change in the real estate market, which we will feel in early 2010.  It is clear now that the end of 2009 was a certain peak in real estate prices and, by nature, what goes up, comes down.  In other words, from here on, the increases will stop and a new period will commence in which the prices in high demand areas decline and initial reductions of no more than 5% will be seen in peripheral regions.
The buying groups, which guarantee significant savings in apartment costs as compared to apartments purchased from a contractor, will continue to proliferate and prosper, offering a popular alternative for new apartment buyers in Israel.  In 2010, they too will be a significant factor that will have a strong effect on the number and quality of transactions.  The developers and contractors, on the other hand, will be unable to continue quoting the substantially higher (about 20%) prices as compared to the buying groups and will be forced to "cut" prices in order to stay in the picture.  This, in turn, will lead to a sweeping reduction of prices in the market for new residential apartments.

Tel Aviv and the Dan Region

If the price of apartments in Tel Aviv, during the past year, reached one of the highest levels ever in the history of the city, then in recent months, a decline has been recorded in the number of transactions completed in the Dan Region.  However, the constant demand for apartments in the city, against the backdrop of their perpetual shortage, will not allow the market to decline substantially.  The prices will stabilize at the current levels, where unique assets and luxury apartments will continue to be sold at above average price levels.
Especially severe is the shortage of office space in the city and the demand just increases year over year, and is expected to grow further in 2010.  As a result, and despite the expected stabilization in the market for residential apartments, the price of office space will continue to increase next year.

Jerusalem

The foreign residents, who have led to increased prices of up to 10% in the past year, bringing the prices of apartments in Jerusalem close to a peak of all times, have now settled down.  Reports from the capital already describe a drastic decline in foreign residents showing an interest.  The devaluation of the USD vs. the NIS has detracted from the attractiveness of investing in real estate in Israel.
The emigration of the secular population from the city, which is expected to increase in 2010, will reduce the demand and stop the wave of price increase in Jerusalem, which has been prevalent for several years.
Therefore, prices will stabilize at their current level in most of the city's neighborhoods.  In luxury projects and neighborhoods, such as Rehavia, the German Colony and Talabia, prices are even expected to record a slight decline.

Southern Periphery

In Ashdod, the halt in foreign investor transactions put a stop to the whirlwind increase in apartment prices in recent years, especially in the marina area.  The prices have already stabilized in the "Israeli" neighborhoods and the forecast is that the prices will decline by about 5% at the beginning of 2010.
In Rishon LeZion prices have already stabilized and initial declines of up to 5% are already apparent.  This relates also to Ness Ziona and Rehovot, which reported increased prices of 20% and more, and their prices are not expected to change dramatically during 2010.
Beer Sheva is the only city in the south in which prices are expected to increase by up to 5%, mainly because of the timing of the appearance of various growth factors in the southern city, such as Rte. 6, the military training camp city and university expansion.

Northern Periphery
The apartment prices in Haifa and its surroundings, where the increase in prices was nearly imaginary, following a severe slowdown before 2009, probably reached a certain peak and are expected to stabilize in 2010.  In any event, all of the professionals involved in the field agree that we will not see prices going up there.
In Netanya, in which foreign investors comprise an important catalyst to the real estate market, the prices have stabilized last summer.  In 2010, there will not be any price increases and if there are declines, they will not exceed 5%.
In Carmiel, the prices will probably continue to decline, as they had begun to in 2009, reaching a decline of 10-15%.  2010 does not bring with it any tidings to the northern city and any change in the security situation in the north may further complicate the ability to finalize transactions.