Is it wise to buy a property now?

At this time of writing, it has now been over seven weeks since October 7th. Our thoughts and prayers remain with all the hostages and their families, those who have lost loved ones, suffered trauma, been forced to relocate, and the success of the war being waged by our soldiers.

In my last article ‘Functioning in the Face of Devastation’ I explained how important it is that everyone, especially those who have been financially impacted by the war, assess their financial situation, and I offered tips for how to regain immediate financial stability and weather the current storm.

While here in Israel we struggle daily with our war-related challenges, and Jews around the world deal with growing antisemitism and insecurity, people have begun to contemplate the day after and have started asking about investing in general, and more specifically in the local real estate market. Many feel insecure with the local financial uncertainty but still want to invest their funds well and avoid having their savings eroded by inflation. Uncertainty is currently high given the war and all its financial repercussions, including the unknown total costs of the war, loss of productivity and long-term impact on our economy. Let’s review a number of critical points in order to help you decide about one of the largest and most significant lifetime financial decisions we all make: buying or investing in a home in Israel.

Residential real estate

  • The local real estate market has been frozen for the last year. The volume of sales has plummeted with minor reductions in prices available in most locations around the country.
  • If we add the new reality of war and all its implications into the mix, we are seeing the lowest transaction volume in decades, with the exception of possibly the early corona months when all government offices were closed and thus not recording transactions.
  • Beyond the minor price reductions, contractors have been offering many different types of incentives, including interest rate caps on mortgages, and giving extras that are included in the price. This method is preferred by sellers who do not want to offer significant reductions, often leading to more buyers staying on the sidelines waiting for prices to continue to drop.
  • Prices have statistically started to go down but because of how prices are tracked, the stats don’t show the whole picture. The Central Bureau of Statistics measures price changes over 12 months and because prices were still increasing 12 months ago, we aren’t seeing the true month over month decrease that is happening on the ground. While the annual decrease in prices has been minimal (less than 0.5% annually), over the last quarter there has been a growing decline in the prices of new homes.  And if we exclude government subsidized homes, the decrease has been even larger. Additionally, as economic activity slows down as a result of the war, price falls can be expected to accelerate over the next 6 to 12 months.
  • The higher interest rates have increased the carrying costs of mortgages, making it more difficult to afford an apartment, or hold onto current real estate. This new financial reality has left many people contemplating whether they can afford to stay in their current place, especially as several industries face the fall-out from war.
  • In September, the inventory of unsold new homes rose to a peak of over 61,000 homes. This is a level that has not been seen in years, an increase of over 40% in 18 months. And that was before the war.

In summary, we currently are facing the triple whammy of higher interest rates, shrinking demand, and higher unsold inventory. These factors should give everyone some food for thought before proceeding.

Even before the war I was advocating checking finances carefully before buying a property. The increasing interest rates meant that mortgages were going to cost more to repay, and in addition the increased cost of living meant that everyone had less disposable income. It’s very easy to get caught up the excitement of buying a property with a very Israeli yiheye beseder (it’ll be ok) attitude, and thus I always stress the importance of doing a thorough budget and financial plan before committing to a long-term mortgage.

While the situation regarding buying a ‘second-hand property’ remains the same, with the onset of the war, buying ‘on paper’ has become even more complicated. Building contractors were already in a difficult place before October 7th due to the dearth of sales but the past seven weeks have increased their financial woes. The reduced sales and cashflow and compounding high interest rates over time have eroded contractors’ liquidity, increasing the chances of insolvency. There is a real risk of more contractors going bankrupt as banks call in loans that are in arrears.  Banks are already making large allowances for bad debts, and these allowances are mainly for the real estate sector.

Additionally, all work on construction sites stopped once the war started. The contractors mostly rely on Arab labor which was banned from October 7th.  Many of the restrictions have since been lifted, which means that most building sites have become operational to some extent. However, very few, if any, have the full manpower that they were reliant on before the war. Although companies are looking to the government to give permits immediately to bring in foreign workers, the numbers will not match the 250,000 Arab workers who used to be employed on the sites thus the dates for project completion will be delayed significantly.

Does all this information mean that the market will very likely continue going down?

Yes, but …

Do your homework

All of the above translates into ‘check out your options really carefully’. Decide on the sum you can invest, after you have left yourself a responsible emergency fund. Work out the mortgage you can comfortably afford to pay back. If you are buying ‘on paper’, in addition to factoring in all the unknowns, look very thoroughly at the building contractor you are considering buying from (and if you can’t do it yourself, ask a professional for assistance). If you are sure that the company is a safe risk, make sure you have a good lawyer review any contract, to protect yourself if the project doesn’t reach completion. And don’t forget to negotiate, negotiate some more and then even more.  The market’s downward trend should provide bargaining opportunities for purchasers in many situations. I believe that the local real estate market will show significant weakness in the near future. However, once we have defeated our enemies, the market should recover strongly with a major factor being the significant expected Aliyah from our brethren abroad, all clamoring for a home in Israel.  Every cloud has a silver lining.

I genuinely feel that Israel has a special sanctity, and with G-d’s help over the millennia we, the Jewish people, have defied the odds. With His help now we will prevail over our enemies, and our economy will recover and be stronger than it was before. However, we always have to do our part.  And in this case it means carefully checking before you commit to a piece of property. Am Yisrael chai.