People who have bought new apartments under construction could find that their price unexpectedly rises 10%-15% during the coming years due to increases in the cost of building materials.
The final price for virtually all new projects sold in Israel is linked to the government’s building cost index, which tracks changes in the cost of building materials and labor. Financing that is spread out over the years the apartment is under construction is linked to monthly changes in the index.
“So, for example, if you bought an apartment for NIS 3 million and put 30% down, the initial NIS 900,000 would be at the price you agreed on,” said Nachi Paris, the senior real-estate agent at Jerusalem’s Nachi Realty. “But all future payments are subject to whatever the building index went up since you signed the contract. So the NIS 2.1m. that you owe now could rise to NIS 2.3 or NIS 2.4m. in three years.”
During most of the past decade, the building cost index rose 1%-2% a year. However, the index is up 3.4% in just the first six months of 2021, and experts expect it could continue to rise at a rate of 5% a year for several more years.
Breakdowns in supply chains and high costs due to COVID-19 are the main culprits. Global prices for wood, glass and steel have more than doubled since the beginning of the pandemic.
In Israel, a large importer of cement told clients this week it would raise prices 15% due to the rising cost of materials it imports from Turkey, according to reports in the Hebrew press.
All of this comes on top of skyrocketing real-estate prices throughout Israel. Housing prices have risen 7.2% in the past year, according to the Central Bureau of Statistics, and they show no sign of slowing down. Data for new-home sales and mortgages taken show records being broken each month.
The government has made lowering housing costs one of its key goals, and the Finance Ministry has said a comprehensive new plan to rein in the market will be published in the coming days. However, Construction and Housing Minister Ze’ev Elkin has said prices are going to continue to rise even more dramatically in the coming year.
Among those who have been hurt by the rising building cost index are those who bought subsidized apartments in the government’s Mechir Lemishtaken program several years ago, Paris said. Their clocks started ticking when they won the government lottery to be able to purchase the low-cost units, and many got locked into five-year commitments at prices that are rising faster than people could have anticipated at the time, he said.
“The developers are all very happy because it’s money they make without the buyers even realizing it,” Paris said. “A lot of the big developers have large warehouses that already have the glass and other materials they need, so their costs aren’t rising. But they are still entitled to add the index, so they can pocket an extra 10% or so.”
Some contractors are agreeing to let buyers pay more in cash to minimize future price increases, but many are not, depending on the terms of the sales contract, said Ori Bibas, a real-estate agent for At Home in Jerusalem.
Paris said he is advising his clients to go for apartments that are already built so that they know how much they are committing to pay, instead of buying on paper. In theory, a buyer of a property under development could try negotiating with the contractor to remove the link to the building index. But Paris said he had never heard of that being done.
Bibas said people looking to buy apartments should do so quickly due to the rapid price jumps. He did not discourage people from buying on paper as strongly as Paris did, but he suggested that if they do, they should pay as much as possible up front.
Asked about other current Jerusalem real-estate trends, Paris said there is a huge shortage of apartments available for rent.
“I’d say there are about five ‘for sale’ signs for every ‘for rent’ sign out there,” he said. “There’s nothing available in any neighborhood, and anything that goes on the market at a fair price is being grabbed very quickly.”
Regarding new apartment buildings, Paris said similar-sized apartments in similar locations might cost an average of 7%-9% more in a new apartment building than in an older building.
“If you’re comparing, say, a 100-m. apartment in an old building on Shimoni Street to a 100-m. apartment in the new Tama-38 projects being built around the corner on Herzog, it’s probably about 8% more expensive, assuming the old building also has an elevator,” he said. “If there is no elevator, the difference will probably be about 17%-18%. Obviously, these are just general guidelines without taking other variables into account.”