Interest Rate Cuts Won't Lower Housing Prices Alone, Expert Argues

Despite a low inflation rate of 1.5% and a cumulative 1.25 percentage point reduction in the Bank of Israel's key interest rate, bringing it down to 3.5%, housing prices in Israel have not seen the sharp decline many expected. While apartment prices fell by about 1.3% in the past year, with new apartments seeing a nearly 4% drop, these figures are far from the anticipated correction. This situation is attributed to several factors, including the heterogeneous nature of the housing market, where different types of apartments in various locations do not directly compete for the same buyers. Developers are thus less pressured to lower prices for desirable units with limited supply, such as garden apartments or five-room units in certain areas.

The cost of holding unsold inventory, which includes expensive land, credit payments, construction inputs, and regulatory fees, is substantial. Developers are able to sustain this inventory not just through deep pockets, but also through financing arrangements that provide a buffer for lenders. Notably, credit for residential projects surged by approximately 40% in 2025, reaching about 69 billion shekels. Instead of cutting official prices, developers are using incentives like deferred payments and financing benefits to buy time and offer buyers financial flexibility without broadly reducing prices, which could harm profitability and the value of other units in a project.

While the current low inflation environment allows the Bank of Israel to consider further gradual interest rate cuts, which would ease mortgage burdens for borrowers, a rapid decrease in credit costs could paradoxically inflate housing prices. If many potential buyers re-enter the market before an adequate supply of suitable apartments becomes available, savings from lower mortgage rates might be absorbed by rising prices. Therefore, a coordinated approach between monetary policy and government housing policy is essential.

The government needs to reduce development costs, streamline licensing and oversight processes, and expedite the construction of necessary infrastructure for new neighborhoods. Additionally, promoting mixed-use zoning that integrates commerce and employment with residential areas can broaden urban revenue bases. In high-demand areas, easing restrictions on building rights could improve project viability. Until the costs associated with land, development, regulation, and the lengthy planning process decrease, interest rate reductions alone will not solve the housing affordability crisis. Only when cheaper credit is combined with reduced production costs and an increased supply of housing in desired locations and configurations will the market inventory become a genuine force for price reduction.