Economic, demographic and environmental factors affecting urban land prices in the Arab sector in Israel

The land market in the Arab sector in Israel represents a real estate submarket that differs from the land market in the Jewish sector. This submarket is typified by a growing lack of building for residential projects and by widespread construction of homes on agricultural land, often without proper permits. The present study compares land prices in two towns of comparable size, located in close proximity from each other, one of which (Nazareth) has predominantly Arab population and the second one (Afula) is mostly Jewish populated. The analysis covers the period between 1998 and 2012 and is based on land transaction records, published by the Israel Tax Authority. The main study methods were the time trend analysis and multivariate regressions, in which the dependent variable, the price of land, was mutually compared with socio-demographic and environmental variables representing the towns' population and geography. The study demonstrates that property values, reported to the tax authorities in Nazareth, tend to be lower than the actual worth of those properties, and that, despite the geographical proximity of the two towns and their comparable population size, land prices in Nazareth are significantly higher than those in Afula. We explain these differences by a limited supply of land for new development in Nazareth as well as by the opposing effects of the prime interest rate and of internal migration: a rise in both factors is positively correlated with increased land prices in Afula, but with lower land prices in Nazareth.