Why Are Prices So High?

Why Are Prices So High?

(This blog is based on the thoughts of CapitIL Real Estate Agency Sales Director Ben Levene through his market experience. This is not financial advice and anyone making purchases and investments must do thorough due diligence and make their own personal decisions.)

Why are the housing prices so high in the prime areas of Jerusalem, such as Rechavia, Katamon, Baka, and the German Colony?

One comment that my clients often mention is how seemingly unaffordable the market prices are in these areas.

There are many desirable properties available on the market that meet the criteria of my clients, but the prices for these properties are often too high. As a result, some of my clients believe that the market will eventually drop and the value of these properties will decrease.

They have been holding off on making a purchase in the hope that prices will go down. However, despite this belief, there has been little to no movement in the market over the past three to four months which suggests that the market may not be as likely to drop as some buyers had anticipated. 

It is worth noting that predicting market movements is difficult and individual buyers should make their own informed decisions based on their personal circumstances and financial situation.

The Dollar

At the start of 2022, the exchange rate between the US dollar and the Israeli shekel was approximately 3.1. However, it is currently hovering around 3.45, representing a 10-15% increase in the value of the dollar.

It is uncertain what will happen to the exchange rate in the future, but despite economic challenges and rising interest rates, the current appreciation of the dollar has resulted in many people being in a similar financial position, or even better off, when the percentage of savings are taken into account.

Interest Rates

As interest rates have been rising, it is possible that property prices in some areas may decrease as a result. However, in Israel, it seems that many people are not heavily leveraged as the banks are quite strict on the amounts it lends in terms of the loan to value.

In Jerusalem, there are not many people who own large blocks of buildings like in the United States. This means that individual situations, rather than the market as a whole, have an impact on the housing market.

The extreme lack of supply means that moving is very expensive whether renting or buying, so in uncertain times people seem to not want to sell or move.

Developers

In Israel, developers frequently receive guarantees from banks that require them to meet certain sales targets. As a result, the banks will not allow developers to sell properties at discounted prices.

This can affect the housing market by maintaining high prices as developers try to meet their targets.

Additionally, the cost of construction has increased significantly, so if prices were to drop significantly, developers would not be motivated to build new properties. In fact, they may choose to hold onto their current inventory or not build at all rather than lower their prices.

This is a major factor that is preventing prices from decreasing in the housing market. Again, with such a lack of supply in prime Jerusalem neighborhoods it is extremely hard to change this.

Conclusion

There is currently a high demand for properties in Jerusalem, but a limited supply, particularly in prime neighborhoods.

For example, if there are 50 people looking for a 150 SQM property with a sukkah balcony, parking, and modern amenities in the heart of Baka, but only 0 to 3 options are available on the market, it is unlikely that prices will decrease. 

Despite global market conditions, the demand for properties in Jerusalem has seemingly not decreased. In fact, uncertainty in other countries may have driven up demand for properties in Jerusalem, as it is seen as a stable location.

The current ruling coalition in Israel may also contribute to market stability and certainty (though this is not a political opinion.)

In my opinion, the demand for properties in prime areas of Jerusalem is extremely strong and unless the supply significantly increases, prices are likely to stay high or even continue to rise.

In my opinion, what buyers can hope for in the current market is a period of stagnation for the next 12 to 18 months, and it may be advisable to take advantage of any potential opportunities that arise during this time.

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