Question marks surrounding expected developments in the housing market have been increasing recently. Is it true that what is falling (home prices) will eventually rise, and why does it seem that no one is taking advantage of the window of opportunity that has opened recently?
This week we were informed that the number of new home starts in the first quarter of 2023 recorded a significant decline. According to Central Bureau of Statistics data, construction began on only about 15,25 apartments between January and March, a drop of about <> per cent compared with the corresponding quarter last year.
The name of the game is supply and demand. The Israeli real estate market is currently in a traffic jam, or in other words, in a bottleneck that will erupt. People are born, get married, have children, get divorced. None of this happens in the parents' apartment. And the rent? Investors are fleeing the market and rental inventory is shrinking, while demand is not declining at all. Since the purchase tax on investors was raised at the end of 2021, 7,700 rental apartments have been removed from the economy. In addition, building starts in this area are stagnant, so the rate of rent increases jumped by 9% this year for new tenants. And what about long-term rent? This is already an irrelevant curiosity, following the increase in interest rates.
When you talk about contractors or developers, you understand why not everyone has become rich. Entrepreneurship means taking a risk. The idea that contractors/developers profit at the expense of others always dissolves in light of the state of the economy. Yes, most of them took the money they earned and continued to invest in expensive land and tremendous leverage, with the understanding that housing prices and profits will always rise.
But this is a mistake. Home prices in Israel are also falling. It happened in 1995, for example, when, before that, there were a few years of stagnation, people waited on the fence and went back to buying—right—when prices jumped. Another example of the herd phenomenon known in Israel.
Government responsibility – even if it still exists – is not evident on the ground at this stage. However, this week the Ministry of Finance began examining reducing the purchase tax on land for Pinui-Binui developers in order to increase entrepreneurial profit and the feasibility of urban renewal.
Supply goes down and price goes up
It should be recalled that "bulldozer" Ariel Sharon also did not hesitate to give purchase commitments from the state. Today, no one has the public courage to increase supply at any cost as he did during his time as housing minister, during the great immigration from Russia. Benjamin Netanyahu, throughout his years of government, has distanced himself from the housing market like fire. Because why sink as a politician in the face of expectations, disappointments and lack of success?
And after we understand why not everyone is rich and happy, let's get down to the details and numbers. Take Modiin-Maccabim-Reut, which recorded a record 40% price increases in 2022. This is an ideal place for young families that serves as a model and example. But in Modiin there are almost no small apartments - there is a negligible supply of 2-room apartments and a sparse supply of 3-room. Therefore, it is not a city for investors in the classic sense of the term. The city is expected to grow from 100,240 to 2040,40 by 75, adding nearly <>,<> housing units. The decline in the number of transactions in it is <>%. Almost stagnation. On the other hand, is it any wonder when it comes to such prices?
Recall the days of festivities. In the most expensive cities in Europe, according to a Deloitte report, Paris is in first place with a price of 12,916 euros per square meter. In second place, ahead of Munich and London, stands Tel Aviv with 10,322 euros per square meter. Jerusalem, by the way, only with 6,627 euros per square meter (in eighth place).
Meanwhile, contractors are collapsing
The truth must be told, after a decade of increases: the government, as an extension of the public, cannot and perhaps does not even want to lower housing prices. And why would you really want to? 66% of the country's population lives in residential apartments owned by it. State revenues from real estate taxation are approaching NIS 40 billion. A rustling checkout.
The stagnation in construction and infrastructure will severely harm the economy; If the government does not come to its senses, it is expected to lose NIS 32 billion in real estate revenue this year.
Chart , Freepik,
Tel Aviv declined by 60 percent, but on the other hand, according to Central Bureau of Statistics data, there was an increase of 1.3 percent in home prices in the large city in March-April compared with February-March.
Let's look for a moment at the annual price increases of home prices: North - 12.9%, Haifa - 12.3%, Jerusalem - 10.2%, Tel Aviv - 9.7%, South - 8.4% and Central - 8.3%. Where are the price drops? On the margins.
What about renting? Please note that in Tel Aviv, rent increased during the semi-annual period for two-room apartments by 2.12%, in Jerusalem by 7.7%, in Haifa by 5.5% and in Beer Sheva by 3.5%.
Yes, prices will continue to rise. There is no other way out, even if there is a recession a year or two. In the end, it will erupt. Take the last Minister of Housing, MK Zeev Elkin, chairman of the lobby for promoting construction and housing in the Knesset, who says without blinking that "a dramatic reduction in the number of apartments will again lead to crazy price increases."
Way? Contractors will collapse. The execution contractors are at existential risk. A report by the business information company Cocface BDI, on the occasion of the Bridge Conference of the Association of Contractors and Builders of the Land and the Fund for the Encouragement and Development of the Construction Industry, shows that the expected 8% increase in the weighted risk level in the industry in 2023. We've seen an erosion in contractors' profitability since mid-2021. In the first half of 2023, the number of contractors facing difficulties jumped by 40 per cent and it is estimated that 680 contractors will cease operations this year. A third of contractors already report difficulty obtaining credit for construction.
In conclusion, the state simply does not worry that they build enough. People need apartments and the government doesn't even have a proper housing plan.
The small citizen receives a key after five or six years and in the meantime suffers rent increases. So prices won't jump tomorrow either, at least look for an apartment seriously. Maybe you'll suddenly find an opportunity.
The recession in the construction industry, lines for its image
- 25% decline in building starts from peak in 2022 due to uncertainty and increased risk
- A decline of 40 percent in home sales and 46 percent in transactions, and profitability rates that do not exceed the threshold required by the banks
- Continued increase in mortgage interest rates and expectations of continued increase in construction input prices
- Decline in the number of rental apartments, investment in uneconomic long-term rentals, jump in rental cost
- Land tenders fail, with an emphasis on most land tenders for target price
- Financing expenses are 4 times higher than in the past for contractors and developers
- Shortage of professional manpower in the construction and infrastructure industry
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