Israeli Real Estate Developers Shift to Offering Credit Amid Market Slowdown

Israeli real estate developers are increasingly acting as lenders, offering generous credit terms to buyers as a way to maintain sales figures in a slowing market. This shift means the focus is moving from the number of apartments sold to the credit terms and risk distribution involved in those sales. Developers are essentially underwriting buyers, a role typically handled by financial institutions, without the same risk management protocols.

This trend is exemplified by "20/80" deals, where buyers pay only 20% of the apartment's price upfront and the rest upon key handover. This creates a cash flow gap for developers, who often bridge it with larger credit lines or by offering buyers balloon loans for three to four years, with the developer covering the interest payments. This practice, often marketed as "zero interest until handover," results in developers incurring monthly expenses on apartments for which they haven't received the full payment.

Banks are heavily involved, providing project financing to developers and often extending balloon loans to buyers, thereby increasing their exposure precisely when buyer payments decrease. The proportion of mortgages taken as balloon loans, including those not subsidized by developers, reached a record 23.3% in December 2024, a significant jump from 4-5% before interest rates began rising in April 2022.

Developers who subsidize interest are not always pricing in the associated risks, leading to increased costs that are sometimes capitalized into the property's value. This has contributed to a rise in cancellation rates, which stood at 2.3% for deals signed in 2024, compared to just 0.5% for deals signed in the peak year of 2021, approximately two years after the year's end. This indicates a four-and-a-half-fold increase in cancellations occurring earlier in the process.

Bank of Israel has recognized this risk, implementing regulations in April 2025 to limit developer-subsidized balloon loans to 10% of a bank's monthly mortgage offerings. Additionally, projects where over 25% of contracts defer more than 40% of payment to handover will face a 150% risk weighting for credit, requiring banks to allocate more capital. While falling interest rates may eventually improve buyers' ability to pay, they do not recoup the financing costs already absorbed by developers. The core issue in the Israeli housing market is now who bears the credit risk of buyers, with developers increasingly taking on this burden, backed by banks, and ultimately, the public.