BANK OF ISRAELOffice of the Spokesperson and Economic Information

May 4, 2020Press release:

Bank of Israel Research Department analysis: The residential rental market during the corona crisis

Due to the corona crisis and restrictions on movement and employment that were imposed from mid-March 2020, market activity declined. From the beginning of the period until mid-April 2020, there was a decline of up to 50 percent in public interest in renting dwellings, compared with the same period last year. At the same time, the number of home rental advertisements published by landlords declined. However, in the last two weeks of April, there was a marked recovery both on the part of tenants and on the part of landlords, with a return to a level similar to what was prevalent prior to the imposition of restrictions.

The sharpest decline in the number of rental advertisements among the cities (more than half relative to the situation prior to the imposition of restrictions) was in Jerusalem. The main exception is Tel Aviv, where there was a significant increase in the number of dwellings offered for rent as early as mid-March, apparently due to the decline in tourists’ demand for Airbnb apartments and the transition of those apartments to the local rental market.

Overall in Israel, there has been no significant moderation in requested rental prices, at least thus far. However, while there was a decline of about 15 percent in rental prices in Tel Aviv following the imposition of movement restrictions, that decline was from a relatively high level, so that requested rental prices have now returned to close to where they were a year ago.

Introduction

The outbreak of the corona pandemic and the ramifications of the measures taken to deal with the pandemic have led to an economic crisis and to greater uncertainty than usual. The Bank of Israel is monitoring various economic developments on an on-going basis, and for this purpose has compiled a set of rapid indicators in various fields that help in making policy decisions at the Bank and in the Bank’s function as economic advisor to the government.

In order to obtain a picture of recent developments in the residential rental market, the Bank presents rapid indicators of demand sentiment, alongside supply and rental prices with a geographic breakdown at a weekly frequency. Google Trends indices of searches for rental housing provide an indication of demand sentiment (tenants). The supply side is presented by the number of residential rental advertisements on Internet advertising sites, from which indicators of the development of rental prices are also derived.1

1 It should be noted that the data presented herein are indicative of rental prices in new contracts. During normal times, rental prices in existing contracts are rigid, since they are determined at the date the contract is signed. The findings presented herein are relevant to the owner-occupied housing services component of the Consumer Price Index (about 71 percent of the Housing component, and 17.2 percent of the overall CPI), which measures the change in rental prices in

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The supply side: Residential rental advertisements

The supply side is presented through the number of new advertisements of homes for rent on Internet advertising sites2 (1.5–5 room homes). It should be noted that the number of advertisements typically shows seasonal behavior, with the low point generally reached in April. As such, in the context of the current crisis, an increase in the number of advertisements specifically in the recent period would show an uncharacteristic increase in supply and support the expectation of a decline in rental prices.

Figure 1 shows the data from the start of the year (solid blue line) and the same period last year (dotted red line) at weekly frequency and with a geographic breakdown in line with the Central Bureau of Statistics. In general, in the four weeks following the imposition of restrictions on movement and employment in mid-March, there was a decline of between 30 and 40 percent in the number of new advertisements in most areas. However, in the past two weeks (April 12-25), there has been a significant increase on the supply side. The prominent exception is Tel Aviv, where supply increased as early as March, in contrast with the seasonal pattern in which a general decline in supply would have been expected during the period.

In addition to the prominent exception of Tel Aviv, Jerusalem and the southern region were also exceptions. In Tel Aviv, there was a sharp increase in the number of new advertisements, and cumulatively since the start of the restrictions, there were about 67 percent more rental advertisements published than in the same period last year. This apparently reflects a broad transition of Airbnb apartments that were mostly intended for tourists to the domestic rental market, as reported in the media.3 This development supports the expectation of declines in rental prices in Tel Aviv.

new and renewing contracts, and not to the rents component, which measures rental prices in all contracts.2 On average, about 2000 new advertisements are published per week since the beginning of the year. SOURCE: Bank of Israel based on Homely.3 There is another indication supporting this, which is also obtained from the Google Trends indices for searches for Airbnb apartments in Tel Aviv. These searches declined sharply from the middle of March, and until now there are no signs of recovery.

Demand sentiment: Google Trends data

To examine developments of demand sentiment in the rental market, we used the Google Trends index for the rate of online searches for terms expressing interest in the rental market.4,5 It should be emphasized that the index does not directly measure the level of demand for rentals, but rather the relative popularity of searches for rental homes as a share of all online searches. We therefore treat it as a sentiment index and not as a direct measure of demand. However, there is support for the index being indicative on the demand side, which comes from an examination that found that the Google Trends index in a given month is well correlated with the rate of change in rental prices in the following months.

Figure 2 shows the index at a weekly frequency from the start of the year until the week ending on April 25 (solid blue line). For comparison, the development of the index during the same period in the previous year is also shown (dotted red line). The data point for the week before the imposition of restrictions on movement and employment (the week of March 8–14) is emphasized. The data show that until the imposition of the restrictions, the development of the index was similar to its development in the previous year. Once the restrictions were imposed, there is a clear decline in demand in the following four weeks, of up to 50 percent compared with the same period in the previous year. However, in the past two weeks, the market appears to recover. These findings hint that in recent days, the sense that the closure is ending has led tenants to resume searching for homes in view of the gradual opening of the economy.

The (requested) price4 The index was built for a search for the terms: “rental apartments”, “Yad2 rental apartments”, “rental apartments Yad2”, “renting apartments”, “Yad2 renting apartments”, “renting apartments Yad2” (all in Hebrew).5 Google Trends data show the relative popularity of selected search terms relative to all searches on Google.

The rental price requested in residential rental advertisements can provide an indication of actual price. This is obviously not the price at which the rental contract is closed, but rather the price that the landlords ask, and it constitutes the opening price for negotiations between tenant and landlord. However, an examination of the development of requested rent shows that it is indicative of the final price. In particular, the change in requested price has been found to correlate with the change in actual rental price in new contracts in the following month.

In order to measure the rate of change of rental prices, we must examine dwellings with similar characteristics. As such, the analysis focuses on 2.5–3 room apartments6 in various areas. Figure 3 shows the average requested rental price in various areas since the beginning of the year. For comparison purposes, it also shows the development of those prices in the same period last year.7 In general, other than the Tel Aviv region, there has been no unusual development of prices in the various regions, and in a number of regions, the requested rental prices is even higher than what it was last year.

In Tel Aviv, while there was a sharp decline of about 15 percent in rental prices, that decline was from a relatively high base level, and in recent weeks, the level of requested rent has been similar to what it was last year. The increase in prices in Tel Aviv before the announcement of closures, and to a certain extent in Jerusalem as well, may be due to the entry of apartments intended for short-term rental (Airbnb) to the market. The quality of these apartments is generally higher than that of average apartments, so the requested rental price for them is higher. However, the increase in price was not accompanied by an increase in the number of advertisements for that period (Figure 1).

6 This group was found to have the best predictive power for actual rent prices.7 The figure for the entire country is an index built on the basis of rates of change of rental prices in the various areas.