Rent increases in the housing market are at the highest annual rate since 2008, the Central Bureau of Statistics reports. Rents have increased by 8% over the past year and fueled by interest rate hikes, and inflation, rents are expected to carry on rising this year.
There have been signs on the ground with complaints from tenants, about exceptional increases in apartment rents (well over 8%) by their landlords. The statistics support these claims only partially.
But a clear pattern of substantial rent increases is emerging. In 2020 rents hardly rose because of the outbreak of the Covid pandemic. In 2021 rents rose by 3.3%, while in 2022 rents increased by 6.3%, with most of that increase in the second half of last year.
In addition, starting in 2021, the trend of seasonality that characterizes the rental market began to decrease. This market is characterized by high demand after Passover and in the summer months, which leads to rental prices that reach their peak in June and July. After that, during the High Holidays, and in the winter there are decreases in demand with landlords more willing to compromise on price. However, in 2021 the decreases recorded in the winter were very low, while in the current winter the increases in rental prices continue, even if not at the rate of the summer. Since May 2022, the housing services index has risen by 5.6%, a rate not seen since 2010, and the close connection between this and interest rate hikes cannot be ignored.
Interest rates push investors into raising rents
The first factor pushing up rents is that when interest rates rise there is a fall in returns for investors following a rise in their financing costs and in order to compensate themselves for this they hike rents.
Hebrew University of Jerusalem School of Business Administration Real Estate Financing MBA program head Dr. Yair Duchin says, “A large part of the apartments belonging to investors were bought with mortgages and when interest rates rise their debt also rises and they pass this on to the rent price.
A second factor that seems even more significant is a fall in the number of apartments being purchased. Since people live in rented or owned apartments, the less that people buy apartments, the more people need to rent apartments, which increases the demand for rented apartments. These two factors put upward pressure on rents, when interest rates rise, and this is the opposite of apartment prices, which tend to fall when interest rates rise.
Dr. Duchin adds, “Those people who wanted to purchase an apartment, when inflation and interest rates rise, find it a more difficult task and some turn to the rental market. So there is no doubt that both on the demand side and on the supply side, interest rate hikes are related to an increase in rents, although it is not possible to point to the strength of the relationship. It is already related to the economic situation, the situation of other factors in the real estate market, and there are those who are also returning to live with their parents, because they can’t afford the rents.”
Eight rate hikes since last April
Last week the Bank of Israel Monetary Committee raised the interest rate by 0.5% to 4.25% – the eighth rate hike since last April when interest rates were at a historic low of 0.1%. The interest rate is currently at a similar level to 2008. In 2023 people have been taken by surprise, having gotten used to a low interest rate environment for many years.
Inflation is another factor pushing up rents and it is no coincidence that rents rose at similar rates to today in the 2008-2011 period when interest rates and inflation were rising.
Are we in a similar situation to the cost of living crisis in 2011. Dr. Duchin says, “The fundamental factor is the level of inflation, and so far we see that the Bank of Israel is unable to cope with it. The only thing the government can do is to approve a restrained budget, but this is contrary to the demands of the various coalition partners, so it is not certain that they will be able to meet this goal.”
Dr. Duchin raises another concern and says, “I hope that someone will not come along, following the increase in rental prices, and try to enact a populist law that will not allow landlords to raise rents. A populist law of this type may cause another sharp decrease in the stock of investment apartments, because investors in the real estate market will prefer to sell their apartments and take their money out of the market.”
Published by Globes, Israel business news – en.globes.co.il – on March 1, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.