A person with all the most up-to-date data in front of him or her will most probably reach the conclusion that the Israeli residential real estate market of 2025 has gone mad. It may be that the sector has never presented such contradictory numbers and such different trends at the same time, signifying one thing above all: the sector is mired in prolonged confusion. The question is, where does it go from here? In what direction is the Israeli residential market headed?
How deep is the confusion? Three facts from the Economic Division of Bank Leumi illustrate it well. Building starts have remained at a fairly high level since mid-2022, at about 18,000 housing units per quarter. Completions, however, have been declining - in other words, there are fewer and fewer homes that have finished being built and are ready for occupation. Accompanying this, sales, especially of new homes, have been very volatile over the past two years, in part because of financing offers to potential buyers by the contractors, which reached a peak in 2024, and have since been reined in by the Bank of Israel.
Some more interesting facts are worth adding to the mix: a substantial drop in sales of new homes, by tens of percentage points in Israel’s largest cities, Jerusalem and Tel Aviv; and a constant rise in the number of homes under active construction (about 190,000 at the end of the first quarter of 2025), and of unsold homes (about 81,000 in May this year).
On the face of it, all these figures ought to be a prelude to significant falls in prices, since supply is high, demand is low (as evidenced by the continually declining number of transactions since beginning of the year), and the contractor’s interest is to sell, and offload homes that are still on the shelf. But the numbers don’t necessarily align with that. Home prices have indeed fallen for the third successive month (a sequence that hasn’t been seen in Israel for a long time) according to the Central Bureau of Statistics, but by very small amounts: a total decline of 0.6% over the three-month period. Meanwhile, the total of new mortgage loans taken by the public continues to be high. The figure for June was NIS 9 billion, one of the highest monthly figures so far this year.
Confused? You should be. The industry continues to present contradictory figures, and it’s not certain that it’s possible to put one’s finger on any single factor as the agent of chaos. It’s even more difficult to tell what the future holds for the industry, even if the war officially ends, since there are many more factors affecting its activity besides the heavy and continuing burden of the war.
Rate of construction slows
According to Zachi Artzi, head of construction and real estate at Bank Leumi, it’s too early to say whether the recent falls in the Home Price Index indicate a trend or are a temporary phenomenon. "There have been many changes in the past year and a half, and even before that, and we need to look at a longer period to understand where we’re going," he says. What mainly disturbs him is the decline in building completions, and the growing gap between the number of building permits issued and the number of building starts.
"This is certainly significant," he says, "reflecting one of the main problems today: the shortage of manpower in the building industry in particular, and in Israel in general. This situation leads to a slowdown in the whole construction process, in building starts, during construction, and in finishing construction. In the past few months, the number of people employed in the industry has recovered, and returned to the level it was at before October 7, 2023, but the rate of construction is considerably lower than it was before the war, even though the vacuum has apparently been filled, which probably reflects the low skill level of many of the new workers, holding back recovery in building completions."
Artzi cites data gathered by Bank Leumi’s Economics Division, according to which the period from starting work to completion of a project has risen to an average of over 34 months, from 32.7 months on average on 2023 and 25.8 months in the previous decade. That is to say the process has lengthened by over a third within a decade.
Artzi attributes this mainly to a shortage of skilled workers, but not only to that. "Training a construction worker is not like training an agricultural worker. It’s a much longer process, and so even if the gap is closed numerically, and the number of workers in the industry is similar to what it was before the war, the expertise of the new workers is still not such as can enable work processes to speed up.
"The bureaucracy also has a large impact on the rate of construction. That, in my view, is the main spoke in the wheels of the momentum required in the housing market. The assessment by the professionals in the field is that from the moment that an Israel Land Authority tender is won to the time that a building permit is obtained, on average, four to four and a half years go by, which compares with an average of three years a decade ago. That is not reasonable.
"As a result of that, the construction process is considerably longer than it was, and that affects the rate of sales and the building completion statistics. In the end, someone has to bear the financial consequences of this situation, and that someone is the homebuyer."
Urban renewal accelerating
If there is any optimism to be derived from the current situation, Artzi sees it in urban renewal. In recent years, urban renewal has accounted for about a third of all building starts in Israel, and although the proportion has gone down slightly in the past year (to around 26%), it is still contributing a fair proportion of building starts, and according to Artzi that proportion will grow.
"The growth in building starts in urban renewal reflects a very important trend, a trend that generates significant reserves of land and an alternative to all the other channels. The geographical spread is expanding, so that today you can see urban renewal in the periphery and not just in the center. A significant proportion of building starts is already in urban renewal, and, looking ahead, this is a trend that will increase, both because of the need for protected spaces in homes, as the war demonstrated to us, and because of the need for reinforcement against earthquakes.
"If we add to that the inelastic demand for homes in Israel, versus a small amount of available land, to the point that there are settlements with no land left to sell, the conclusion is clear: urban renewal sites will have an even greater weight in the housing market, much greater than up to now. We at Leumi are financing very many urban renewal projects all over the country, including renewal of whole neighborhoods, and that is certainly a sector that will be a growth engine, both for developers and for the entire financial system."
Will certainty restore demand?
In recent years, the real estate industry, and specifically the residential market, has had to cope with many challenges: the Covid pandemic, the rise in interest rates, the long war, and the consequent shortage of workers. All these things have happened within a very short time, five years, but the industry has managed to deal with each of them in one way or another. What will happen this time, especially after the war ends?
"The market has coped with challenges for many years now, and despite it all, looking back, it has shown adaptability and has kept moving. If we take 2024 as an example, a year in which sales were very high despite the war, we can see that the market learned to adapt. Developers, contractors, the financial system, every element in the equation, learned to deal with the notion born out of the recent challenging period: the new normal. That’s a concept that changes all the time, and you learn to deal with it. The fact that the construction companies and the developers demonstrated resilience and strength, that most projects are conducted responsibly, that building sites are working as usual, are the best evidence that in the new normal, all sides have behaved sensibly and in accordance with the needs of the hour," Artzi says.
"We believe in the housing market," he concludes. "Our job is to keep the market moving in a reality of uncertainty, and the goal is truly to bring it about that it will move forward from here on as well. The end of the war and the return of certainty - these are events that will support demand in the markets, and particularly in the housing market, which represents a strategic growth engine. Development of the housing market is a national mission. All concerned need to join the effort to reduce bureaucratic barriers and get projects moving, and thus to allow the market to grow."
Due disclosure: "A number a week" is an editorial project in collaboration with experts from Bank Leumi. What is stated in the article should not be seen as an alternative to the reader’s independent judgment or an invitation to carry out purchases or investments or any business transaction of any sort. It is not a replacement for personal investment advice that takes into account the needs and circumstances of each individual.
Published by Globes, Israel business news - en.globes.co.il - on July 21, 2025.
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