Everyone wants a home in Jerusalem, and Jews from abroad are buying out entire neighborhoods, raising prices beyond the means of local residents.

American Jews. Around the corner on Ahad Ha’am Street, a much smaller three-bedroom went for $490,000 to British Jews, who will use it as a vacation home.

There is a great paradox in all this. Jerusalem may have some of the most expensive real estate in the country, yet the city is an economic backwater.

According to statistics given by StartUp Jerusalem, a nonprofit initiative aimed at revitalizing the city, about 7,000 highly educated young people leave the city each year and 40 percent of residents live below the poverty level. The boom in apartment buying is mainly fueled by diaspora Jews who seek a connection to the city and the Jewish people, particularly during holiday time—Rosh Hashana, Sukkot and Pesah.

Nachum and Chaya Klein are typical of many who have bought apartments in Jerusalem. Modern Orthodox Americans in their sixties, they have been making what they call “gradual aliya.”

Both are physicists and not yet ready to retire—but their daughter lives in Jerusalem with her family. “For years, we came twice a year and stayed at a time-sharing hotel,” says Chaya Klein. “But as academics, we are able to come for longer periods of time, so we bought a [two-bedroom] apartment in Wolfson Towers, the high-rise buildings overlooking the Knesset on one side and the red roofs of the Shaarei Chesed neighborhood on the other. Having an apartment makes us feel that we are not tourists. Our grandchildren stop by. They sleep over. They see us as living here.”

The Kleins’ apartment boasts a large living room-dining room area and a study. They paid $390,000 two years ago. “They were fortunate to buy when they did,” says Dafna Levi, a real estate agent for the Habitat Agency in the Wolfson complex. “Not long ago, a similar apartment in Wolfson sold for $520,000, and now someone is asking $728,000 for a comparable apartment.

“Everybody’s buying,” Levi adds. “If you want to be part of certain American and Canadian Orthodox circles, you buy a second apartment in Israel. And people are willing to pay out-of-mind prices for elite neighborhoods.”

“The hot neighborhoods are Rehavia and Talbieh, Kiryat Shmuel, Katamon, the German Colony and Baka,” explains Vic Hoffman, a broker at Alex Losky Real Estate. “The price hike has not affected [poorer] outlying areas like Kiryat Yovel or Gilo. People want to be in walking distance from the Kotel and the hotels where friends and family visit.”

There are some affordable alternatives near the city center, but not many. “The Ramat Rahel housing complexes near the Haas Promenade on the other side of Derekh Hevron is less expensive, but still in the loop,” says Harriet Elazar, an interior designer with clients in the high-rise complex built by building contractor Reuven Ella. A two-bedroom apartment in Ramat Rahel costs $380,000, while in nearby Baka it could be $100,000 more.

“There are many established Israelis who can afford these elite neighborhoods” says Hoffman, “but the prices shut out the young Israelis. However, for the New Yorker who reads that homes in Long Island are going for $2 million, $1 million might not be out of line for a special apartment.”

European Jews are also buying real estate because the pound and euro are strong and mortgage rates are low. Stuart Hershkowitz, deputy C.E.O. and head of the International Department of the Bank of Jerusalem, feels that empathy with the plight of the Israelis during the intifada has led Jews throughout the world to feel an even stronger tie to Israel. During the intifada, they expressed it through charity, today they are buying homes here. “In the last year,” he says, “the Bank of Jerusalem financed almost 40 percent more mortgages than it had a few years ago.”

However, the strongest motive among Europeans, particularly for French Jews, is buying as a hedge against anti-Semitism. “Jewish youth have been threatened by Muslim youth and instructed not to wear kippot in the street,” says French-speaking Sonya Lunski, a real estate agent for Lafayette Real Estate Agency.

Hershkowitz feels this has forced French Jews to confront the changes in the demography of France, where the Muslim population constitutes 10 percent of the country.

“They’re buying like mad,” says Lunski. “At times I feel like I’m at an auction. A buyer agrees to a price, and before it’s out of his or her mouth, another bidder comes up with a higher price. Some of those buying apartments are coming on aliya. But it’s also become a fashion in the last two years for French-Jewish professionals to buy second apartments in Israel. Many seek a modest pied-à-terre near the sea, in Tel Aviv, Ashdod or Netanya. The more religious are willing to pay high prices for Jerusalem’s special atmosphere.”

Jacques and Yvette Rosenberg, orthodox jews from Paris, came on aliya a few months ago. They paid $1 million for the second floor of an old stone house in Rehavia. “I love the high ceilings, the large balcony,” says Yvette Rosenberg, who explains that they sought a better education for their children, but anti-Semitism was also at the back of their minds.

Miriam Bloch, an Orthodox woman from Lyon, recently bought a modest two-bedroom in Rehavia and is planning to rent it out. “I feel that even if anti-Semitism is dormant at the moment, the Arab population is growing and it’s bound to get worse in France.” Bloch also insists that Jerusalem is the only place to live.

No one denies the emotional reward of owning an apartment in a city replete with Jewish history and spirituality. But is it good for the city? Seventy percent of those who have second homes in Jerusalem leave them empty most of the year. They come for Pesah and Sukkot or for the summer. The most outstanding example is David’s Village outside of Jaffa Gate, an isolated neighborhood of terraced townhouses with no commercial areas, designed by the well-known architect Moshe Safdie with his trademark arches. The homes are very expensive and pitched to non-Israeli investors.

“This should have been a bustling Jewish neighborhood connecting West and East Jerusalem,” says Nomi Mirsky, a public relations executive. “In fact, it’s a ghost town most of the year. Thankfully, this has not happened [to that extent] in other neighborhoods where Jews have holiday homes.”

Asaf Shaked, city planner for the Neighborhood Authority of Ginot Ha’ir, which oversees neighborhoods from Rehavia to the German Colony, is incensed at the phenomenon of absentee landlords. “I wish they had never bought these apartments,” he says. “They’ve raised the prices in the city. Young people like myself become refugees against our will. My wife and I wanted to live in the city, but it was not affordable.

“Contractors are building expensive new apartment buildings with parking facilities, elevators, sukka balconies to fit the needs of the foreign buyers. But the apartments remain empty most of the year. Children don’t go to the schools from these apartments. Their parents don’t buy at the supermarkets most of the year. They’re not part of the texture of the city.”

Instead, Shaked is moving to Tzur Hadassah, one of the suburbs outside the city that is seeing an influx of secular professionals. The high price of apartments is not the only reason for the movement. The housing boom has not brought greater investments in commerce and industry, and there are few job opportunities. Jerusalem is also perceived as an ultrareligious town, dominated by haredi influences.

There has to be a change of mood, a change of image [in Jerusalem],” says Arthur Spector of the Spector-Amisar architectural firm, voicing a common view among academics and city planners who agree the city must be reinvigorated. Spector, whose firm will be designing the new Hadassah Hospital campus, believes that Hadassah’s new facility will contribute to this change of image.

According to Amit Elgad, an urban-planning student at the Hebrew University of Jerusalem, there are about 4,000 empty apartments in Jerusalem. This number includes some of the homes owned by Jews from abroad, but many are older, smaller apartments that have fallen into disuse because their owners are in old-age homes or have died. The latter, Elgad claims, can be renovated and rented to young professionals. “There should also be tax breaks and subsidized housing to lure young people back,” adds Hoffman.

Uri Shetrit, Jerusalem’s municipal engineer, insists that Jerusalem must continue to build and develop. “A frozen city is a dead city,” he says.

Five years ago, he initiated a master plan that will balance areas for preservation with areas for high-rise development. Shetrit makes no secret that one of the plan’s goals is to maintain Jerusalem’s Jewish majority, and he envisions adding 150,000 additional housing units for Jewish residents. The master plan calls for increasing the density of population, allowing a maximum of 8 units per 1,000 square feet, instead of the 4 to 5 units allowed until now, and increasing height to a maximum of 6 floors instead of 4 in certain areas.

However, Shaked questions whether constructing taller and wider buildings to increase Jewish population is worthwhile if the apartment owners aren’t living there.

“Experience teaches that ultimately many of these residents settle here,” counters Shetrit. “They promote the economy, increase employment, pay city taxes. And that’s in addition to the belief that Jews of the diaspora should see Jerusalem as their home.”

Still, a few local merchants do benefit from the influx of property owners who fly in for the holidays. “People send faxes ahead of time to order their fruits and vegetables for the holidays,” says Yaakov Yom Tov, who runs Yom Tov’s Fruit Store on Aza Street with his brothers.

Pinny Amedi, a Rehavia delicatessen owner, feels the influx of Jews buying apartments in Jerusalem is only for the good. “The contractors who were expanding this building went bankrupt,” he says, “and French Jews took it over and finished it. Now they’ve sold it to other French Jews. Some rent out their apartments. They invest their energies in the country… The diaspora Jews who renovate these apartments are redeeming them for the Jewish people.”