Forecasting what’s going to happen in the coming year is a tricky business, especially in the Israel residential real estate market. Just ask Tal Aldrotti, Israel’s Chief State Appraiser, “If you want to know whether prices fell in 2017, ask me in 2018,” Aldrotti said at the opening panel of Nadlan City, Israel’s most important real estate conference which take place in Eilat every December (we of course were there!). “Anyone standing with a stopwatch and expecting to see prices start falling on a certain date is fooling himself.”

It’s much easier – and less risky – to pinpoint some of the trends that are likely to affect home values. Here are a few important indicators.

by Avishai Shklar

The government is likely to keep on encouraging Israelis, particularly young couples, to buy apartments in the Galilee and the Negev. “Buy apartments, invest in the future,” Netanyahu said during a late-December 2016 visit to Ma’alot-Tarshiha, not far from Israel’s northern border. Netanyahu previously delivered the same message about Beersheba, Dimona and other southern Israeli cities.

Government efforts to bring down housing prices, or at least slow their upward spiral, have yet to produce dramatic results. In fact, says Eliav Ben-Shimon, chairman of the National Builders Association, Finance Minister Moshe Kahlon’s much-heralded Price Resident scheme, designed to lower housing costs for young couples, has actually driven prices up. “The program,” he said, “is simply not the right solution for our housing situation.” And the Hamodia newspaper, quoting other industry sources, says that “anyone who has been waiting out the high prices before buying a home in Israel still has some time – probably a lengthy amount – before prices start falling.”

The S&P Maalot went a step farther, predicting that housing prices would continue to go up in 2017. According to the rating service, increases might be moderated by aggressive marketing of the government’s Price Resident program. Noting that the anticipated number of completed new residential units and the number of new families entering the housing market was about equal at 48,000, S&P said, “We do not see pressure on the demand side for lowering prices. If the trend of reduced building starts continues, we may see pressure for increased prices, due to continued hard demand for housing.”

Some observers take a less sanguine view. For example, the Shoresh Institute for Socioeconomic Research observes that annual supply of completed new housing units has exceeded the number of new families since 2013 and anticipates that lower demand will affect residential values. But about the same time that these predictions were published, Israel’s Central Bureau of Statistics reported that housing prices in the first eight months of 2016 had risen nationwide by a robust 6.8%.

Opening of new rail lines and extension of Highway 6, the Trans-Israel Highway, is likely to boost values in the cities they serve. Reopening of the historic Valley Train by Israel Railways in October is expected to have a positive effect on the economies – and residential values – Yokneam and Afula, where the line’s stations are located. According to real estate appraiser Haim Mesilati, property valuations in locations with rail tend to be up to 25% higher than similar communities not on the rail line. The principle is confirmed by Haim Feiglin of the Israel Builder’s Union, who notes that prices in Afula and Migdal Ha’emek, both near Valley Train stations, have exceeded those of the rest of the country in the past year.

Rail lines to Afula and Tel Aviv may turn Tiberias into a Northern Israel “metropolis” and enhance residential real estate prices. Recently approved plans to extend the Valley line from Afula to Tiberias and for a high-speed rail link cutting Tel Aviv-Tiberias travel time from three hours to one will turn the historic city of Tiberias into a “metropolis,” says Transport Minister Yisrael Katz. Experience indicates that improved access creates new industries and jobs, providing a major boost to local economies which is reflected in higher residential housing values.

Home values in the South, especially Beersheba and Ashkelon, have shown sharp increases. The State Assessor’s report for 2015, the latest available in late December 2016-early January 2017, apartment prices for Beersheba and Ashkelon rose by 14% and 11% respectively.

Exclusive Jerusalem neighborhoods, projects in and around city center all remain attractive. Demand for new and second-hand residences continues to be high in the capital’s Rehavia, Talbiyeh and German Colony neighborhoods. New projects in the city center attract considerable interest due to their high level of amenities and proximity to the city’s finest restaurants, the Ben Yehdua pedestrian mall and the Mamilla shopping mall, the Mahane Yehuda outdoor food market, the Jerusalem Light Rail and the fact that they’re within walking distance of the Old City and the Western Wall.

High-end residential valuations are considered the least likely to be affected by any slowdown, if one actually materializes. Clara Zwergel, head of construction finance operations at Bank Hapoalim, foresees no “dramatic” change after more than a decade of steadily rising home prices. Nor does she expect anything like the 2008 U.S. housing “bubble” – certainly not in the higher market segment. “In the U.S. luxury market,” Zwergel told the Ha’aretz newspaper in October, “buyers don’t pay until they get the property, while in Israel you pay a certain portion in advance or there’s a penalty. So in Israel it’s not likely we’ll have an extreme situation in which prices fall very sharply, as happened in the United States during the sub-prime crisis. Here (in Israel) prices don’t fall because there isn’t a lot of supply – and there’s no supply that doesn’t fund demand.”

Housing prices in Tel Aviv can be expected to stay considerably higher, and accelerate more quickly, than in the rest of the country. In early 2016, the average price of an owner-occupied dwelling (including small and inexpensive homes) in the city stood at about $667,000, compared to $470,000 in Jerusalem, $460,000 in the Sharon area, and about $370,000 nationwide.

Heavy demand in Tel Aviv continued to make the gap even wider. A December 2016 report published by a Tel Aviv-based company said that Tel Aviv prices were 17% higher than 2015, and up 4% from the previous quarter, with national home up 9% and 2.5% for the same period.

Non-mortgage interest rates in Israel are not expected to change drastically in 2017, despite the FED’s recent interest rate hike. According to Globes eight investment firms predict that the interest rate in Israel will remain unchanged at its current low point of 0.1% until the end of 2017, while five firms expect a moderate rise to 0.25% by the end of next year.

Mortgage rates keep going up. According to the Bank of Israel, the average interest rate on index-linked mortgages rose to 3.67% in November, up from 3.53% in the preceding month. The Globes business daily said rates rose by 1.1% over the past year, and by 1.7% over the past 18 months. Interest rate 15-20 years mortgages, on the most popular, rose to 3.93%, compared with 3.81% in the preceding month while the rate on 20-25-year mortgages rose from 3.90% to 4.02%. The increase covered both short and long-term mortgages.

The new tax on third apartments applies to overseas owners as well as Israeli residents. Under the new regulation, which became effective on January 1, owners of three or more apartments will be taxed 1% per month on the assessed value of every apartment they own, beginning with the third. The move, a pet project of Finance Minister Moshe Kahlon, is designed to “encourage the sale of assets and depress the prices of new ones,” says Likud Knesset Member Miki Zohar, one of the legislators who shepherded the bill through Israel’s parliament.

Purchasing residential real estate remains one of Israel’s best domestic investment – if not the best of all. In the 8-year period between 2008 and 2015, average housing valuations rose by a stunning cumulative total of 102% – an inflation of 4.1% in 2008, 18,5% in 2009, 14.6% in 2010, decline by 2.3% in 2011, then continued going up by 4.1% in 2012, 7.38% in 2013, 7.41% in 2014 and 6.88% in 2015, the last year in which annual totals are available at press time.