Israel’s rental sector is tightening even as home prices fall, setting the stage for a policy clash between key government ministries over the future of long-term leasing. The Planning Administration in the Interior Ministry is advancing a far-reaching overhaul meant to expand and professionalize the market, directly challenging a Finance Ministry proposal that would scale back the amount of rental housing developed on state land.
The dispute surfaced after the Central Bureau of Statistics reported another rise in rents in the Consumer Price Index. While the for-sale market has slowed, rental supply continues to shrink and prices remain high compared with the national average income.
A draft of the Arrangements Bill recommends reducing mandatory long-term rental allocations, arguing that nearly half the tenders the Israel Land Authority issued since 2023 failed due to poor economic feasibility. Current rules require 30 percent of land in large fast-tracked housing zones, known as Vatmal areas, to be set aside for long-term rentals, some at reduced prices for eligible tenants.
The Finance Ministry wants greater flexibility to lower those percentages. It has instructed the Planning Administration to consult the government assessor on whether new zones should include fewer rental units. It also seeks a review of existing zones, with the option of cutting requirements if projects seem unviable.
The Planning Administration says reducing rental stock will worsen an already fragile market. About a third of Israelis—roughly 2 million people—rent their homes, generating an estimated NIS 46 billion a year, yet only about 2 percent of Israel’s housing was designed as rental from the outset. By comparison, rental rates are significantly higher in major Western countries.
Officials are preparing a two-track plan to expand the sector. The first is an institutional model that designates land for permanent long-term rental buildings on state or private land. Developers would receive tax incentives and lower land valuations in exchange for maintaining the units as rentals indefinitely. These projects would feature professional management, unified maintenance and community services, departing from the current model in which rental buildings often convert to private ownership after 10 to 20 years.
To make the projects viable, the model encourages higher density, reduced parking standards, integrating rentals into mixed-use developments and imposing higher capital-gains taxes on developers who try to sell projects on the open market.
A second track would regulate Israel’s existing private rental market. Landlords could opt into a supervised lease system in exchange for lower tax rates—dropping from roughly 10 percent on rental income to about 7 percent.
The government company Dira Lehashkir would set national standards for maintenance, tenant protections and price stability. Any tax incentives must receive approval from the Israel Tax Authority, which planners say must fully support the effort for it to succeed.
Planning Administration director Rafi Elmalich said the proposed structure draws from cities such as Vancouver and London, where long-term rental housing is supported by targeted zoning and financial incentives. He warned that eliminating the ability to designate a share of land for rentals in new plans would derail the market, though he said limited reductions could be considered in areas suited for permanent rental housing.
Elmalich noted that success depends on proximity to public transit and major employment centers. He highlighted a Haifa development by Golden Art as a working example, where hundreds of long-term rental units are being built as part of a new urban neighborhood led by developer Eitan Benjamin, who has extensive experience in institutional rental projects overseas.
Israel continues to lack reliable rental data because landlords earning less than about NIS 5,600 a month are not required to report income. The Finance Ministry has again proposed mandatory reporting for all rental units to build a national registry and narrow gaps in the Consumer Price Index, but the measure failed in the previous legislative cycle and faces opposition now.
Meanwhile, the Housing and Construction Ministry is advancing a parallel plan that includes incentives for private landlords and an aim to market 40,000 new rental units by 2030. The ministry also wants to strengthen Dira Lehashkir, which has produced only a few thousand long-term rental units since its establishment nearly a decade ago.