Interest rates and apartments: a blow to contractors, but is it good for buyers?

The increase in interest rates kept a large part of the investors away from the market, but even though there will be some contractors who will be forced to discount the apartments, the demand based on the high natural increase in Israel will continue to be high and will prevent a drop in prices.

In other words: the mortgage will become more expensive but the price of the apartment will remain high

Greenberg roasts

10/20/2022

Thursday, October 20, 2022, 08:21 Updated: 08:36

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Investors are leaving the real estate market, but will prices drop? (Photo: ShutterStock)

Is the boiling market in Israel on the way to stagnation?

After the decrease in demand experienced in the residential apartment market with the increase in interest rates, the supply will also be affected due to the increase in the costs of financing various projects in the real estate sector.

It is expected that some contractors will stop their activities in light of the erosion of profit margins, and that many of the entrepreneurs and small contractors will not even be able to survive the period Interest rate increases. In the capital market, the field is carefully studied and mapped according to the companies and entrepreneurs who prepared for the crisis by raising hundreds of millions of shekels into their cash coffers, compared to those who did not arrive ready for it, and relied on the price levels and the value of the land or projects they had.

"The more experienced" say sources in the capital market "understand that in order to raise money in bonds during such a period of rising interest rates, when the bond is considered the cheapest debt raising channel in which funds can be raised, they need to give an interest rate in excess of that which investors can raise in government bonds , for example, which is less

risky

. This raises the level of interest they will have to pay on bonds to approximately 6%, which is already a high interest rate."

of 10%-12% on average from a range of 6%-8% up to approximately six months, according to sources in the non-bank credit industry. This is in addition to the increase in the cost of the financing that the companies receive from the banks, which requires considerable additions.

"You need to understand" add the same sources in the capital market "that any increase in the percentage of interest on the capital raised means tens of millions of shekels that are cut from the contractors' profits, and sometimes even completely reduce the feasibility of initiating and carrying out the project for some of them."

Attorney Eran Balint, partner at the law firm Sheblat & Co. (Photo: Oren Dai)

Bad for contractors, but is it good for buyers?

There is an overwhelming agreement on the effect of the interest rate increase on the situation of the contractors, but the experts are divided about its effect on apartment prices.

Some believe that the contractors will be pushed into a corner and forced to sell more apartments on paper and with various discount promotions, and another believe that the price trend will stop, but not decrease.

In the economic review of Bank Leumi published yesterday (Wed), it was noted that the volume of sales of new apartments is on a downward trend, and last August was at a level of approximately 2.8 thousand apartments, a figure that is about 50% lower compared to August 2021.

In addition, it states that despite the decrease In terms of taking out mortgages, the rise in apartment prices continues, but Leumi economists estimate that "looking ahead, against the background of the continued accelerated process of raising the Bank of Israel's interest rate, the rate of increase in apartment prices is expected to moderate in the coming months and there is a real possibility of price decreases in 2023."

, explained that "there are currently two opposing trends in the market: on the one hand, a significant increase in interest rates that makes it difficult for apartment buyers and moderates the entry of investors, thus reducing the demand for residential real estate.

But on the other hand, the supply of apartments in Israel, and especially in the demand areas, remains low even relative to the demand today.

This is also in light of the political situation, which has created a stagnation in the regulatory procedures of planning and construction, and also due to the reduction in the margins of developers, who are more cautious when entering into transactions, and especially cash transactions for the purchase of land, some of which have decreased, is expected to decrease significantly, and will decrease the supply of apartments.

These two opposing trends balance each other.

However, in light of the expectation of another interest rate increase, it can be said that a moderation in the increase in apartment prices is expected, and in my opinion, they are expected to stabilize at their current level in the near future."

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CPA Moti Detelkramer, managing partner at the consulting and accounting firm BDO (Photo: BDO)

Which projects are expected to be affected?

CPA Moti Detelkramer, managing partner at the consulting and accounting firm BDO

, added that "in the US the mortgage interest rate has doubled and is a precursor to what will happen in Israel, but before analyzing the money it is important to examine the demand and supply.

In this context Israel has a strong demographic, relative for the rest of the western countries, which greatly affects the demand in the real estate market.

However, it must be remembered that the problem lies

in the households' ability to pay, and we may reach a certain point where people will no longer be able to pay."

1 billion shekels in January this year. We should also note that the mortgage consultants are also feeling the slowdown.

Detelkramer continues: "On the supply side, the small contractors will have to examine the way they operate, as the estimates are that they will not be able to pass on the full new financing costs to the buyers.

But the question is which projects will this affect?

As of now, the problem will be mainly in new projects, but we do not see any prospect of a drop in prices at this time.

If a contractor, for example, started a project about a year ago, then the new financing costs do bite into his profit margin, but the project is still viable.

Besides all this, if the interest rate rises another 1.5%-2%, then there will be a higher probability of a price drop.

In addition to the contractors, we must remember the apartment improvers and the sellers of second-hand apartments, some of whom are already dependent on a mistaken conception of the price of their apartments, which are sold at a margin of about 5%-10% down, depending on the periods of stress and the areas where those apartments are located."

It doesn't matter if you choose to purchase an apartment now or in the future, the main thing is that you understand the financial significance of the entire transaction - including the financing costs (Photo: ShutterStock)

The solution?

Increasing the supply and understanding the issue of financing

"The most important issue is increasing the supply" emphasizes Detelkramer "and the government can do this with the help of various programs, as it had in the past, if it decides that this is part of its priorities."

Balint targets the apartment buyers and recommends that they use a bank financing consultant "in order to build a correct mortgage mix, along with a mix of payments with the contractor or the seller. Today's apartment prices are no longer fully linked to the construction input index, but only at a rate of 40%, and this moderates the increase in the price of the apartment the newly acquired one".

And we won't end without one piece of advice of our own: first understand what you are buying, and how much it will cost, including the mortgage repayment and the associated costs, and only then start the race to the apartment.

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