New Apartments Prices And The Construction Index.

TL;DR

If you are considering buying an apartment in a development the construction index is an important factor which must not be overlooked. The index of input prices in residential construction is an index provided by the Central Bureau of Statistics. This is a very important index for buyers of new apartments, because the payments to the contractor are linked to the construction attention index aspect. The government just passed a law to tamper the effect of materials inflation in an attempt to cool off the price of residential units. How does the new law affect the buyers? And will it really achieve the government’s goal of reducing the price of apartments?

The Construction Index

The index of input prices in residential construction is an index provided by the Central Bureau of Statistics. This is a very important index for buyers of new apartments, because the payments to the contractor are linked to the construction attention index aspect. The index is calculated monthly and published in the middle of the month by the Bureau of Statistics and it measures the changes that occur over time in construction-related expenses.

For example products, services, materials and more. As part of the index, the prices of materials and services from various manufacturers and suppliers are measured, as well as the price of various works related to the construction of houses and apartments. The index is used by architects, contractors, craftsmen and even customers to get an estimate of the expected linkage of construction contracts to these price changes..

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Sharp Increase Since 2020

Inflation is now deeply entrenched in all layers of the economy. Raw construction materials like steel and cement have spiked due to supply and more specifically, logistical constraints. People who have purchased an apartment from a constructor have borne that increase in the index as payment tranches are adjusted for the increase in the index from the previous period.

That is not to say that the increase in prices of raw materials was reflected 1 for 1 in the index. Historically, the payment schedule was not a big issue and was mainly dependent on the terms of the buyers' sources of financing. Lately however, the entrepreneurs have been adamant in backend loading the largest payment tranche so as not to carry all the risk of the increase in the prices of materials.

The new law however has shifted more of the onus of the price increase onto the entrepreneurs. A maximum of 40 percent of the price of the apartment is to be linked to the index in when purchasing an apartment from a contractor.

Any first payment given to the contractor and up to 20 percent of the total purchase price - will not be indexed, while the other payments that will be paid later, will be linked to only 50 percent to the construction input index. It was further decided that the linkage will be until the handover of the apartment only.

How Will It Affect Buyers?

So that's great news for buyers who are thinking of buying an apartment from a contractor. The uncertainty regarding the final price of an apartment has been partially mitigated, especially if you've got 3 to 4 years to wait until delivery. We do have reservations however as this new law is not addressing the fundamental reason why apartment prices went up so much in the last couple of years. This policy is at best misguided and at worst, ill-guided: It was drafted for the sole purpose of appeasing the discontent.

Will It Work?

If anything, anyone with a minimum understanding of how markets work, will understand that this will only incentivise the entrepreneurs to increase their prices today as a "buffer" for the future increase in the prices of construction materials (or their expectations of it).

One of the ways to cooling new apartments prices lies elsewhere, but will be unpopular with politicians and the government bureaucrats. The permitting process is a disaster. It's comprised of a meander of committees who do not seem to communicate with each other, making the whole experience drag on for years on end.

Exchanging plans and opinions in a bureaucratic void reminiscent of the Soviet era with the only purpose of fattening paper pushers, lawyers and architects. Cutting that process by half at least would already relieve the bottleneck and ease the delivery of more apartments.

This is a supply issue, prices are only a symptom of the disease. Any policy aimed at curbing the symptoms will fail and a decrease in Tel Aviv new apartments prices is nowhere in sight.

Published April 28, 2024