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Rising costs of building materials drive up housing prices

For an apartment costing NIS 2 million ($620,688), the expense for buyers went up NIS 20,000 ($6,200) just since March

Laborers work at a construction site for a modern skyscraper in Tel Aviv, Israel. Illustrative, April 2022 (Roman Mykhalchuk via iStock by Getty Images)
Laborers work at a construction site for a modern skyscraper in Tel Aviv, Israel. Illustrative, April 2022 (Roman Mykhalchuk via iStock by Getty Images)

New apartments in Israel just got even more expensive, as suggested in the monthly Central Bureau for Statistics (CBS) residential construction index which looks at the costs of building materials.

The index is designed to make sure that, for projects that can take a number of years from first design and pricing to delivery, any significant changes in the costs for materials can also be adjusted. Any purchases off-plan will typically have a contract clause that links the final price to the construction index at the point of delivery. This means that any increase in the index leads directly to higher house prices.

Builders themselves have already been signaling that they are under pressure from rising prices for raw materials.

Last month, the general residential construction index increased by 1 percent. For an apartment costing NIS 2 million ($620,688), the expense for buyers just went up NIS 20,000 ($6,200).

Since March 2021, the building cost index has risen 6.6%, adding about NIS 132,000 ($41,000) to the cost of an average apartment.

Those increases relate mainly to the materials and products used in home construction and to the rental of equipment and vehicles (including fuel costs) for building sites. There is continuing global pressure on these costs, with disrupted shipping worldwide and the Russian war in Ukraine having a major impact on energy prices — all adding to overall costs.

Norman Shapiro of First Israel Mortgages told The Times of Israel that it is increasingly common for housing contracts to ensure that, regardless of how early payments are made, any increases in construction costs are applied across the entire cost of the housing unit, not merely in relation to the outstanding amount. So even if most of the apartment is paid for, there could well still be a substantial final payment to reflect the inflation in construction prices.

“Contractors are putting into contracts that you can pay down the balance early if you want to, but the building index will impact on any payments that post-date the increase, raising the end price of the property,” he said.

In addition, the Bank of Israel has not only increased interest rates by 0.25% but has also signaled that it expects additional increases of up to 1.5% over the year ahead .

Mortgage borrowers not on a fixed rate will likely find their loan trending upwards, adding tens of thousands of shekels to the costs of home-buying. New fixed rates will be proportionally higher, and prices of apartments in the second-hand market will also be significantly affected.

According to a separate report by the CBS earlier this month, housing prices in Israel rose by 15.2% between January-February 2021 and January-February this year, marking a sharp 12-month climb in an already brutal housing market defined by soaring demand and inadequate supply.

According to the CBS report, prices for brand-new apartments rose by 17.8% in January and February 2022 compared to the same period last year, climbing by just over 5% from December 2021 alone. Demand was highest in Tel Aviv-Jaffa, Bat Yam, Jerusalem, Ashkelon, Netanya, and Rishon Lezion.

Finance Minister Avigdor Liberman had said in December that housing prices would “moderate” by the end of 2022 and that he believes Israelis may even see prices drop in the coming years. Outrage over the spiraling housing costs and the rising cost of living has been growing across the country, more than a decade after Israel last saw widespread social unrest on the matter.

As the recent massive over-subscription for the first government housing lottery of the year indicated, there is huge, pent-up demand for affordable housing.

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