Israeli Developers Rent Out Unsold Homes Amid Market Stalemate

Israel's housing market is experiencing an unusual trend where developers are opting to rent out thousands of unsold apartments rather than lower their prices. This strategy allows companies to generate immediate income and avoid officially devaluing their properties, hoping to sell them later when market conditions improve. This shift is driven by a significant surplus of new apartments, with approximately 84,990 units remaining unsold as of late July, representing nearly two and a half years of supply at current sales rates. Major urban centers like Tel Aviv, Central Israel, Jerusalem, and Tel Aviv-Yafo hold the largest concentrations of these unsold units.

While overall sales volume saw an increase in May-July compared to the previous quarter, driven partly by government programs, sales in the free market, particularly for new apartments, have declined. In July, free market sales of new apartments dropped by about 26% from June. This indicates that while buyers exist, they are increasingly hesitant to commit at current prices, especially with the ongoing burden of mortgage payments. Despite recent interest rate cuts by the Bank of Israel, the cost of borrowing remains a significant factor for potential homebuyers.

Developers are reluctant to slash prices for fear of devaluing their existing inventory and potentially impacting how banks assess their projects. Instead of offering direct discounts, they are exploring options like financing assistance, deferred payments, or, increasingly, converting unsold units into rental properties. Examples include a Danya project in Modi'in where unsold units will be rented for two years, and the Panorama North project in Bat Yam, where a significant portion of units will be leased long-term.

This strategy of renting out apartments is seen as a way for developers to "buy time" and wait for market recovery, rather than accepting a definitive price reduction. The rental market has proven more resilient, with rental prices showing consistent annual growth. While renting generates cash flow, it doesn't resolve the issue of developers not receiving the full sale price, and financing costs continue to accrue. This approach is more feasible for financially stable developers who can afford to wait. Additionally, some developers may leverage tax incentives for long-term rental housing projects.

Previously, developers used schemes like "20/80" or "10/90" to ease the initial financial burden on buyers without lowering official prices. However, these have become less effective as buyers remain cautious about long-term commitments at current prices. The current situation is characterized as a prolonged tug-of-war between sellers unwilling to lower prices and buyers unwilling to pay them. For prospective buyers, this presents opportunities for negotiation, but they must carefully assess the total cost of any offer, including deferred payments or rental options, and understand the terms of rental agreements with developers.