Middle Class Exits Israeli Housing Market as Renters Accept Lower Quality Apartments
Recent data from the Israeli Central Bureau of Statistics (CBS) for the second quarter of 2026 reveals a clear trend: renters are compromising on apartment quality amid rising rental costs, while affluent buyers dominate the housing market. The housing market is increasingly inaccessible to middle-class buyers, who are opting not to purchase homes under current conditions.
The CBS housing service index, reflecting rental price fluctuations, rose by 0.7% in July compared to June, driven mainly by new renters and those changing apartments who now pay on average 4.7% more than their predecessors. Renewing tenants contributed to a smaller increase of 2.6%. Meanwhile, the average rent at the end of June reached 5,086 shekels per month, up 1.9% from the previous year. The disparity between the service index and average rent growth suggests renters are choosing cheaper, lower-quality apartments, likely older or smaller units or those in less sought-after areas.
Government policies have negatively impacted the rental market by imposing high purchase taxes that deter private real estate investors, who traditionally supply rental housing. Attempts to encourage long-term rental investments by private and institutional developers have stalled due to high interest rates and insufficient government incentives.
Regarding home prices, the overall housing price index rose marginally by 0.1% in May-June compared to April-May. Smaller districts such as Jerusalem, Haifa, the North, and the South saw price increases, while major districts like Tel Aviv and the Central district experienced declines. Jerusalem led with a 1.8% rise in the last two months, but after previous sharp drops, it ended the quarter with a 2.5% price decrease. Tel Aviv and the Central district also recorded quarterly price declines of 2.2% and 1.4%, respectively.
New apartments primarily drove the modest price increases, with their index rising 0.9%, while second-hand apartment prices appear to have fallen. The average purchase price for apartments in the second quarter hit a record 2.435 million shekels, nearly 4% higher than the first quarter and 3% above the previous year. This surge is attributed to a higher proportion of expensive apartments being bought, especially in Tel Aviv, where new apartment sales reached a five-year high. Mortgage data from the Bank of Israel shows a record share of loans for apartments priced at 5 million shekels or more, indicating that wealthy buyers are sustaining the market. This trend suggests the middle class is currently withdrawing from the housing market, likely to return when conditions improve.
