The Global Economic Crisis and Its Effect on the Israeli Real Estate Market– A Real Estate Lawyer’s Perspective

Israel is not an island unto itself although it may seem so at times. In the past few years we have seen a booming real estate market in Israel, with prices in major cities such as Jerusalem and Tel Aviv, and the periphery, such as Modiin and Beit Shemesh, skyrocketing.

Jews from North America, England, and the rest of Europe who wanted to have a foothold in Israel invested in real estate, and many did so with the help of Israeli mortgage banks. Real estate investments were buoyed by the high rate of exchange for the dollar. At the beginning of 2006 the exchange rate reached 4.7 NIS to the dollar. The rate of exchange for the British pound and the Euro were also at record highs.

As a result of the high exchange rate, much of the real estate market (whether for second hand or new apartments) was priced in dollars, and simply paid for in shekels at the representative rate of the dollar on the date of payment. This allowed foreigners with strong currencies to purchase real estate in Israel without worrying about currency fluctuations.

Additionally, real estate prices abroad were also high, so that a foreigner could sell his house in New York or London, get an excellent price and have plenty of money to purchase real estate in Israel. Circumstances combined together to make the Israeli real estate market an attractive one.

About a year ago the situation began to change. Real estate markets in the U.S. and England began to fall and it became difficult for people to sell their properties before making Aliya.

In the summer of 2006, the dollar began to fall, even plummeting to well below 3.4 NIS to the dollar at one time. Other currencies have also devaluated against the shekel in the past two years. While the British pound was just over 8 shekels to the pound in October 2005, recently the exchange rate has been hovering at a little under 6 shekels to the pound. Similarly, the Euro was over 5.5 shekels to the Euro in October 2005, and today it’s closer to 5 Shekel to the Euro.

The prevailing economic situation has made it increasingly difficult for North Americans and Europeans to purchase apartments in Israel.

How will the current global economic crisis affect the Israeli real estate market? Some will argue that foreign investors who may have taken a beating in the stock market will have less money available to invest in real estate. Others will argue that real estate will become a more attractive investment than the potentially volatile stock market.

For local real estate buyers and sellers, the situation is also unclear. In the short term there may be a downturn in real estate sales simply because people are erring on the side of caution, worried about possibly losing their jobs or their ability to pay their mortgages.

Experience has shown that the real estate market tends to be cyclical. When prices are high, or economic times are difficult, there is a slow down in sales. When this happens, prices may fall to encourage sales, more transactions occur, and the market comes out of hibernation.

A key difference between the Israeli marketplace and that in the US is the behavior of the mortgage banks. The Israeli mortgage banks, unlike their American counterparts, have traditionally behaved cautiously when deciding who they will give loans to and under what conditions. The paperwork requirements have often made life difficult for borrowers and their real estate attorneys but the banks’ caution has proven beneficial to the Israeli real estate market.

Continuing caution on the part of the Israeli mortgage banks together with a slow and conservative lowering of prices may bring about a rise in real estate transactions. The timing of such a rise is uncertain, but the trend is to be expected.

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