How can we know that the residential real estate winter is here? The strongest evidence of change lies in a statistic that attracts almost no attention: the unbelievable proportion of homes being sold off "on paper". Most buyers of new homes are currently buying an option on a home, and not an actual home. This is the background to the latest figures showing a rise in home prices of a further 1.2% in September-October and an annual rise of 20.3%.
According to figure released by the chief economist at the Ministry of Finance last week, recent months have seen a peak in sales of homes that are a long way from completion. In September and October, the proportion of homes sold with expected handover dates at least two years away (end of 2024) was 70% of all homes sold by contractors on the free market, more than 1,000 of the 1,500 homes sold (approximately 400 additional homes were sold under the subsidized Buyer Price program; they too have handover dates a long time away). This is double the proportion of sales ‘on paper’ of two years ago, and three times the pre-sale proportion that the banks generally require before financing the start of construction ("don’t set up a crane or scaffolding until we see that a quarter of the apartments have been sold").
What this means for the market needs to be understood (within the limits of visibility of course). First of all, it amounts to a very interesting statement on by the contractors. They, who have to believe, and repeatedly declare, that prices will only rise (otherwise we’ll wait till tomorrow and not buy from them today), are now choosing to get rid of as much merchandise as possible, instead of waiting a year or two until just before the project is ready, when people will probably be prepared to pay much more for a home they can move into almost straightaway. This doesn’t necessarily mean that these contractors think that prices are on the way down. It does indicate that finance costs are weighing on them much more than they did just a few months ago - the prime interest rate has risen from 1.6% in April to 4.75% now.
To give a fresh example: a non-bank credit company reported last week that in awarding credit to a residential real estate developer it had itself taken credit from a financial institution at prime plus 3.25-6.25%, that is, an annual interest rate of 8-11%, and likely to go higher. This makes it worthwhile for the developer to generate cash flow from buyers immediately, at a very substantial discount, in order to pay back at least part of the credit. This is certainly the case when they see that, while the supply of homes available for handover is low, the Central Bureau of Statistics is reporting peak levels of building permits and of sales of land for residential construction, at a annual rate of 80,000 homes, and 49,100 unsold new homes at the end of October, at various stages of construction, the highest figure for two years.
At the same time, the large quantity of homes sold off the plan is a sign of the slow pace at which the market works and the long time it takes for this huge ship to show that it is changing course. For better or worse, those who buy off the plan actually buy a sort of option, not an actual home. Anyone who buys a home so far from being completed, especially when large, well-established companies such as Africa Israel, Shikun & Binui, and Rotshtein are not requiring the deal price to be index-linked, knows that it will be a very long time before they know whether they are in the money or out of the money, to borrow options terminology. It will take a very long time before it becomes clear what kind of gamble it was, and how much money they made or lost when they jumped on the bandwagon so late. And take into account that no-one knows an Israeli who bought such an option in the past fifteen years, fixing the price of an apartment that would be handed over years ahead, and did not make a huge profit when the exercise date came around.
In real estate, crises emerge slowly
It is clear therefore that even the fear on the part of buyers of a changing wind in the market is limited. When it’s at least two years before they receive the key to the new home, the pressure to sell the existing home or compromise on price (in the case of move-up buyers) or to terminate the agreement with the existing landlord (in the case of first-time buyers), is not high. That’s how it is in a market like real estate: there may be problems at the moment, and there may be surplus supply and a dramatic decline in demand that should hit prices hard, but in real time we can only see the first shoots of a crisis. Patience is still called for.
Published by Globes, Israel business news - en.globes.co.il - on December 18, 2022.
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