Real Estate June 23, 2009, 4:00PM EST

No Housing Market Meltdown for Israel

Despite economic weakness and growing unemployment, most home prices are still rising in Israel

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Late last year many Israelis decided to put their plans to buy houses on hold. With real estate prices falling in every major Western country, the feeling was that it was just a matter of time before the declines made their way to Israel. The number of deals in the last quarter of 2008 fell markedly as the global recession began taking its toll on the Israeli economy.

Yet as of mid-2009, it now appears that Israel's housing market has not only escaped meltdown but is continuing to notch rising values, even as the nation is in the grips of its worst-ever recession and unemployment is rising to levels not seen in years. A May home price survey by Israel's Central Bureau of Statistics reported that prices last month rose 1.5% on average, and in the past 12 months they've jumped 11.4%. That makes Israel one of the best-performing property markets in the world.

Low Interest Rates, Solid Banks

Consider the fast-growing new town of Modi'in, midway between Tel Aviv and Jerusalem. An average three-bedroom apartment there now goes for around $275,000, up by 10% since the beginning of the year. "In the past six months we've raised prices four times, by 2% to 3% each time, on our projects in Modi'in," says Shaul Lotan, CEO of Meshulam Levinstein Contracting & Engineering (LEVI.TA), one of the country's largest builders. The town of 80,000 is especially popular with young families drawn there by its convenient location and reasonable prices.

Property values are rising in just about every part of the country, though not necessarily at the same blistering rate. For Israel overall, the average price of an apartment stood at just over $200,000 at the end of the first quarter, nearly 5% higher than in the last quarter of 2008.

Experts cite various reasons for the vibrancy of the housing market when Israel's gross domestic product is expected to contract by 2% this year. Chief among them is interest rates, which are at record lows. The average rate on 20-year home loans fell in May, to 3.79%, the lowest level since the Bank of Israel began publishing the figure in 1996. "We've witnessed a 20% increase in mortgage applications in May over the previous month and the upward trend is continuing," notes Yaacov Royter, deputy head of retail banking at Mizrahi Tefahot Bank (MZTF.TA), the country's largest mortgage bank.

Unlike their American counterparts, Israeli banks are not saddled with portfolios of bad mortgages. They have traditionally been very conservative in their lending practices, requiring 30% down payments. "On average we will cover up to 70% of the cost of an apartment," notes Mizrahi Tefahot's Royter. That's a far cry from the subprime mortgages that often covered 100% of the price of a new home in the U.S.

New Housing at Record Low

Another factor that has influenced the upward price trend is the record low level of new housing starts. By some estimates there is a shortage of 10,000 apartments in Israel. The situation is not likely to improve any time soon. "Many of the country's major real estate development companies are facing huge losses from projects in Eastern Europe and the U.S. and are reluctant to increase their local exposure at this time," says Bernard Raskin, CEO of RE/MAX Israel, the country's largest chain of real estate agencies. He adds that even if housing construction increases, it would take building on a massive scale to bring prices down.

Most of the purchases these days are of midrange properties priced up to $500,000. And it's Israelis, not foreign investors, who are doing nearly all of the buying. But the top end of the housing market—for apartments and homes with a price tag of $1 million or more—is the sole exception to the upward trend.

Luxury Properties Lose Value

In recent years that market has been dominated by foreigners, primarily from the U.S., Russia, and Western Europe, who have accounted for roughly half of the deals in the upscale neighborhoods in Tel Aviv, Jerusalem, and Herzliya Pituah. But the global economic crisis has dampened the appetite of Russian oligarchs and American or European investors who have either seen their fortunes decline or are in no mood to spend. The number of foreign buyers has actually fallen by 50%, which has led to a 15% to 20% decline in prices for high-end properties, as well as the cancellation of several planned luxury projects.

The consensus is that the high end of the market, which accounts for only about 2% of all deals, will rebound once the global economy recovers. But most buyers should expect to shell out more in the future: Many industry experts are already cautioning that once the local economy turns around, housing prices are likely to skyrocket.

Sandler is a correspondent for BusinessWeek in Jerusalem .