Israeli Housing Market Sees Shift in Investment Attractiveness

The Israeli housing market is experiencing a significant shift in the economic viability of rental properties, with rental income now increasingly covering mortgage interest costs. This change is driven by a combination of sharply rising rents, stagnant or falling property prices, and decreasing mortgage interest rates. In July 2024, rental income in most surveyed cities did not even cover the interest on a 50% mortgage. However, by July 2026, rents are projected to exceed these interest costs in most areas.

Analysis comparing July 2024 and July 2026 data reveals a dramatic turnaround. For instance, in Petah Tikva, the monthly gap between rent and interest costs shifted from a deficit of NIS 730 to a surplus of NIS 820, an improvement of over NIS 1,500 per month. Similarly, in Herzliya, the gap moved from a NIS 2,300 monthly deficit to near parity. Across 11 out of 13 cities analyzed, the average rental yield improved between 2024 and 2026, with notable increases in Netanya and Herzliya (around 20%).

Despite these improvements, the current yields, such as 2.67% in Petah Tikva or 3.21% in Beersheba, remain low compared to other investment avenues. Historically, the Israeli market relied on property value appreciation rather than rental income. The current situation presents a challenge as bank deposits or money market funds offer similar returns without the risks and expenses associated with property ownership, such as vacancy periods, maintenance, and property taxes. Furthermore, the 8% purchase tax on investment properties significantly delays the return on investment.

The market also faces a substantial inventory of unsold new apartments, estimated at around 84,000 units, particularly concentrated in the Tel Aviv and Central districts. A return of investors could help reduce this inventory, but it might also curb price drops and negatively impact first-time homebuyers. The rise in rental prices, while beneficial for landlords, poses a burden on renters.

Investor activity shows signs of increasing, with investor purchases rising to approximately 1,320 units in May, about 16% of all transactions, up from 1,090 units in January. This is still below the historical peak of around 30% before 2015. The coming months will be crucial in determining whether this trend signals a sustainable return of investors or a temporary pause in a downward price trend.