Inflation in Israel is falling: what is happening to apartment prices?

The Israeli economy showed an impressive recovery in the second quarter of 2026, according to an economic review by the Harel Group. According to the data, the gross domestic product grew at an annual rate of about 15%, following a contraction recorded in the first quarter. At Harel, they estimate that the strong figures point to the resilience of the economy and led them to raise the annual growth forecast to 4%.

Growth in the second quarter was supported by several central hubs. Exports, excluding diamonds and startups, jumped by 25%, public consumption rose by 20%, and private consumption increased by 15%. Investments in fixed assets also strengthened, with an increase of more than 6%.

At the same time, the inflation environment in Israel remained moderate. The consumer price index rose in July by 0.3%, mainly following seasonal price increases in the fields of vacation, housing, and flights. Annual inflation fell slightly and stabilized at 1.5%. Harel predicts an increase of 0.9% in the index in August, followed by a decrease of 0.2% in September. The inflation forecast for the next 12 months stands at 1.9%.

Despite the low inflation, Harel estimates that the Bank of Israel will leave the interest rate unchanged in the decision on September 1. This is due to geopolitical and budgetary uncertainty, alongside strong growth data and wage increases. However, an interest rate reduction may arrive later in the year, with the forecast being an interest rate of 3% to 3.25% in six months.

The housing market is also showing weakness. During the last 12 months, the index of owner-occupied apartment prices fell by 1.5%, while the prices of new apartments fell by 2%. The building input index fell in July by 0.1%, mainly following the lower cost of raw materials, but wages in the industry rose by 0.2% due to a shortage of skilled workers.

In the international arena, data from the USA point to a certain moderation in inflation. The consumer price index rose in July by 0.1%, and the core index rose by 0.2%. At the same time, retail sales fell by 0.6% and weakness was recorded in the labor market. These developments reduced the probability of an interest rate hike in the USA in September, although Harel notes that the possibility of a hike later in the year still exists.

One of the prominent issues in the review is actually the American bond market. While inflation is moderating and the chance of a near interest rate hike is decreasing, long-term government bond yields have risen to multi-year highs. This rise also affects bond markets around the world and increases financing costs, but at the same time creates a more attractive yield for long-term investors.

Europe is also dealing with challenges. Extreme weather conditions, including heat, drought, and a drop in river levels, are damaging transport and production, especially in Germany and the chemical industry. Alongside low gas inventories, the developments increase the risk of a rise in food and energy prices. In Norway, the interest rate was kept at 4.25%, with the central bank signaling the possibility of an additional hike due to a tight labor market.

The picture presented by Harel includes several significant contradictions. In Israel, a sharp recovery was recorded despite an environment of uncertainty, while the low inflation is not leading to an interest rate reduction at this stage. In the USA, on the other hand, inflation is cooling but the long-term interest rate continues to rise. In Europe, the weather is becoming a factor with a direct impact on the economy, when disruptions in transport and supply chains could lead to a renewed rise in food and energy prices.