Israeli Contractors Must Cut Home Prices Significantly to Attract Buyers Amid Rising Mortgage Costs
A recent report revealed a 1% monthly decline in apartment prices in Israel, the sharpest drop since early 2018. This follows Bank of Israel Governor Amir Yaron's suggestion at the Calcalist National Economic Conference that contractors should reduce prices rather than blame high interest rates for sales difficulties. However, experts warn that even this steep 1% monthly price cut is insufficient to lure buyers back to the market in volumes seen before the mid-2022 interest rate hikes.
Professor Danny Ben-Shahar, head of the Alrov Institute for Real Estate Research at Tel Aviv University, analyzed housing market data and found that a 5% price reduction would still not restore affordability to pre-interest rate hike levels. The core issue for first-time buyers is the sharp increase in monthly mortgage repayments, which have risen by thousands of shekels due to higher interest rates combined with rising home prices. For example, in late 2021, the average four-room apartment in Israel’s 12 largest cities cost 2.25 million shekels with a fixed mortgage rate of 3.31%, resulting in a monthly payment of about 7,732 shekels. By early 2026, prices rose to 2.739 million shekels and the fixed rate climbed to 4.75%, pushing monthly repayments to nearly 11,000 shekels.
Ben-Shahar explains that a 1% price drop only reduces monthly payments by roughly 100 shekels, while a 5% cut saves about 550 shekels, far less than the 3,200 shekel increase since 2021. Additionally, the required down payment has surged, placing homeownership out of reach for the lower seven income deciles in major cities, who now need approximately 750,000 shekels upfront. This affordability gap has led to a significant decline in housing demand, with new home sales dropping from nearly 35,000 units in Q1 2022 to 21,500 in Q1 2026.
Contractors have previously maintained sales by offering financing incentives, such as deferred payments until receiving keys, which reduce monthly costs more effectively than small price discounts. The housing market now faces a crossroads: anticipated interest rate cuts and the expiration of an 8% purchase tax on investors in December (which will revert to 5% without Knesset intervention) could revive buyer interest. However, with a high inventory of 85,000 unsold new apartments and banks pressuring developers to sell, contractors may be forced to implement deeper price reductions to clear stock and meet financial obligations.
Summary: Israeli housing prices have dropped 1% monthly, but rising mortgage costs mean buyers remain priced out. Experts say much larger price cuts are needed to restore affordability and revive sales amid high inventory and financial pressures on contractors.
