Do you pay the contractor most of the amount in the delivery of the apartment?

You're making a mistake

Israelis tend to be tempted by a deal in which they pay most of the money in the end, but the increase in the construction input index can cost them tens or even hundreds of thousands of shekels.

Experts explain how this story works

David Rosenthal

17/02/2022

Thursday, 17 February 2022, 11:09 Updated: 11:26

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The construction input index is an important and significant part of paying for an apartment in Israel, but most of us are hardly familiar with it.

When you buy an apartment from a contractor and the transaction is spread over payments, the part not paid at the time of purchase is automatically linked to the "construction input index" - an index that reflects the changes in the construction costs of residential apartments in Israel.

This method, in effect, raises the prices of the new apartments purchased from a contractor beyond the original amount stipulated in the negotiations and the contract of sale, sometimes without any price increase justifying it.

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Due to late delivery: A contractor will pay NIS 800,000 to buyers

To the full article

What looks good in the field can cost you a lot of money in the future (Photo: Reuven Castro)

In Israel, most buyers of new apartments do so "on paper", so they wait an average of 4-3 years to receive the apartment and are exposed during this period to an increase in the index of construction inputs to which they are attached.

Nir Shmol (Photo: Tomer Feder)

We will first detail what this index says, actually.

"The construction input index is 'responsible' for an increase of more than 50 percent in the increase in housing prices in the past year," explains Nir Shmol, CEO of the Urban Development and Renewal Company and Snir Company. 11.3 percent, in real estate prices in Israel. This is the highest rate of increase in the index in the last decade in Israel. The increase affects the real estate market more dramatically than we estimate.

"Because the rise in the index does not directly affect the buyers of new dwellings, whose prices of dwellings are linked to the index, but also the other buyers of dwellings in Israel, because the rise in prices of new dwellings indirectly 'attracts' second-hand dwellings, respectively."

In Israel, most buyers of new apartments do so "on paper", so they wait an average of 4-3 years to receive the apartment and are exposed during this period to an increase in the index of construction inputs to which they are attached.

This is a very long period, and during this time the price of the apartment may increase by hundreds of thousands of shekels, if a significant part of the price of the apartment has not yet been paid.

"Many Israelis are tempted by offers of 20 percent in the contract and the balance 80 percent before the population," says Shmol.

Until the projects are perfect it can take a very long time.

Mixing uses project in simulation V5 Architects (Photo: A. Imaging Studio)

Rotary Horror Circle

"We have no control over that, Israel is a country based on imports and all over the world there is an increase in the price of goods, so we are also harmed. Here, too, the country can check itself and check the matter of excessive taxes on imports."

Architect Eyal Apple (Photo: Shirad Nissim)

The bill recently passed by the Ministerial Committee on Legislation approves, in effect, isolating the price of land from the construction input index, and allowing tenants to decide whether to link the price of their apartment to the index or construction inputs, without the cost of land.

Architect Eyal Apple explains: "Issuing the land component is problematic, because the method in Israel works so that the state sells the land to the contractor, he holds the land and while holding it he has to issue building permits. Issuing building permits is a time consuming process. Buys the land, for example, through the manager and until he hands over the apartments and receives the money, five or six years pass. During these years, the contractor paid for the land, took out a mortgage or invested his own money. We'll just get into a situation where contractors will not sell apartments on paper. The land component goes up 10 percent a year and is very significant in the price of the apartment. The contractors will roll the interest on the price of the apartment in the first place because they pay for it, higher".

Apple also explains the second component of the index - the cost of goods.

"We have no control over that, Israel is a country based on imports and all over the world there is an increase in the price of goods, so we are also harmed. Here too the country can check itself and check the issue of excessive taxes on imports. "Luxury. The state should ease taxes on the import of building materials, it causes the apartment's dream to move away and deepens the crisis."

"It is important to emphasize that the contractors are of course also affected by these increases and they also work in the back-to-back method with their suppliers," adds Shmul. , Concrete and other construction products supply and import of these materials which also have the cost of the goods increased.

And maybe it's not worth launching the project at all?

Homes for students in Kfar Melal - Apple Architects (Photo: Apple Architects)

"Local authorities need to make decisions"

Meidad Gendler (Photo: Moriah Cohen)

Meanwhile, in the field there are public projects that have been budgeted for in previous years, and with rising prices there is a vulnerability and an inability to complete them.

The budget cake needs to be redistributed and it is necessary to decide what will remain and what will not.

Architect Meidad Gendler, a partner at v5 Architects, says: “Construction costs have risen dramatically in the last two and a half years because of the trade war between the US and China, and there has been a sharp rise in maritime transportation costs.

This has a major impact on the costs of iron and electromechanical systems (MFA, electricity, plumbing). Of course this is also true for projects that started in 2020 and until now.

"Local authorities have to make decisions, whether to invest extra money in projects or cancel them altogether, which ultimately hurts the citizen waiting for these services. Another solution is to leave the project at the envelope level and complete only part of it, and the rest later when budget arrives. Smaller ones that do not require very complicated logistics. "

So what's the solution?

One of the best tips that can be given to the buying public these days is not to be tempted to deal with 20 percent in the contract and 80 percent before the population, because in periods of sharp rises in the index

Apple explains: "The contractors will not buy the land from the state, the state will sell the land directly to the tenants. The contractors are another 'hand' as in the automotive world. This gap needs to be closed so that everyone benefits. "From the director, you pay directly to the state and the capacitor would build. Today the state wants to get rid of the land and in the end we pay for it."

Shmol actually transfers control of the matter to the buyers.

"One of the best pieces of advice that can be given to the buying public these days is not to be tempted by 20 percent deals in the contract and 80 percent before the population, because in periods of sharp rises in the index, as we experience last year, the differences can reach tens of thousands of shekels. Thousands of shekels until the period of occupancy.

"Another tip is to buy an apartment and at the same time take a bridging loan on the existing property (if any). Such a buyer pays 20 percent equity in the contract and 50 percent a bridging loan in the contract, and only the balance at a rate of 30 percent is exposed to the construction input index. To set a low fixed interest rate, while negotiating with the lending bank, because in the event of global inflation, the world's central banks will raise interest rates and as a result, loans will become more expensive, including mortgages and bridging loans. "

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