Israeli Housing Market Sees Shift in Investment Attractiveness

The Israeli housing market is experiencing a significant shift, with rental income now increasingly covering mortgage interest payments, a stark contrast to just two years ago. In July 2024, rental income in most surveyed cities failed to cover even the interest on a 50% mortgage. However, by July 2026, rental income is projected to exceed these interest costs in most areas, driven by a combination of sharply rising rents, stagnant or falling property prices, and decreasing mortgage interest rates.

This change is most pronounced in cities like Petah Tikva, where the monthly deficit of 730 shekels in July 2024 has flipped to a surplus of 820 shekels by July 2026, an improvement of over 1,500 shekels per month. Herzliya has seen an even larger absolute improvement, with the monthly gap nearly closing. Netanya and other cities like Jerusalem, Ramat Gan, Ashkelon, Holon, and Ashdod have also seen their rental income surpass mortgage interest costs.

The average yield on rental properties has also improved. Between July 2024 and July 2026, yields increased in 11 out of 13 surveyed cities, with notable jumps in Netanya and Herzliya (around 20%). However, these yields, such as 2.67% in Petah Tikva or 3.21% in Beersheba, remain relatively low compared to other investment avenues. Historically, the Israeli market relied more on property value appreciation than rental income.

Despite the positive shift, significant hurdles remain for property investors. Current rental yields are comparable to those offered by bank deposits or money market funds, but without the associated risks, liquidity, and lower overhead. Furthermore, the 8% purchase tax on investment properties, which can amount to hundreds of thousands of shekels on a 2 million shekel property, significantly delays the return on investment. The substantial inventory of unsold new apartments, particularly in the Tel Aviv and Central districts, also poses a risk, as further price drops could negate rental income gains.

Investor activity is showing signs of recovery. In May 2026, investor purchases surged by approximately 43% compared to the previous month, reaching about 1,320 apartments. While this is still below historical highs, it indicates a potential return of investors to the market. The long-term outlook depends on future rent increases, interest rate stability, and the trajectory of property prices, with the market potentially stabilizing or moving towards lower prices.