Israel’s construction industry is in its worst situation in decades. For more than a year, sales of new homes have been falling steeply, at a rate not seen in at least 25 years, according to Central Bureau of Statistics figures. Building starts are also in sharp decline.
In October, 1,819 new homes were sold, less than a third of the number sold in October 2021 (5,648). The rate of new home sales has fallen by more than half since August 2021. November 2021 did see a monthly record for new home purchases, ahead of the rise in purchase tax for investment buyers, but the market trend at that time was already downwards.
In view of this situation, the chances of the high pace of construction seen in 2021-2022 continuing are fast diminishing, and it’s hard to see what action the incoming government might be able to take to keep construction going strong. What’s more, the decline in sales, which seemed slight and temporary, has turned into a severe crisis, making it had for developers to respond, and they are liable to get into financial difficulties.
Exceptional pace of decline
The Central Bureau of Statistics reports that the rate of decline in new home purchases has been running at 5% a month since August 2021. An examination of the state of the market since July 2022, however, shows that the rate has accelerated, and is now at 8% a month. If the market continues like this, within six months it will have gone backwards twelve years.
It’s hard to find anything equivalent to what is now happening in the residential real estate market in the past twenty years. During the Second Lebanon War in 2006, the market fell by more than 40% within three months; at the time of the social protest of 2011, when interest rates were on the rise, purchases fell by 50% within eight months; when the Buyer Price subsidized housing program was underway, in two and a half years between 2016 and 2018 developers’ sales fell by nearly 50%. Still, none of these events comes close in its severity to what the market is currently going through.
It’s hard to explain why the decline in new home purchases began as early as August last year, eight months before interest rates started to rise. It may be that, while in certain cities the supply of new homes fell substantially, in other places, where there was extensive construction, demand ran out of steam.
Another cause could be the Buyer Price program. The program was at its height in 2019-2020, when 40% or more of new home purchases were made through this government program. Since then, it has been in decline, and in 2022 it was clear that it was ending. This contributed both to the decline in purchases and to the decline in building starts, since it will take several years until projects in the new government program A Home at a Discount mature.
As mentioned, the situation in building starts isn’t wonderful either. The number of building starts in the third quarter of this year was the lowest since the second quarter of last year, and 24% lower than in the first quarter of 2022, when a 20-year peak was recorded (19,300 homes).
One factor that could depress building starts even further, and is even liable to affect developers directly, is the method of home sales that has taken root in Israel in the past few years, with fewer people buying homes near their completion date, apparently because of bargains and discounts offered by the developers, alongside the subsidies in the Buyer Price program.
Homes "on paper"
In her review of the housing market in October, the chief economist at the Ministry of Finance, Shira Greenberg, found that 70% of the homes sold on the open market were sold off the plan or at an early stage of construction. "These figures can explain why, despite the exceptional growth in sales by contractors in 2021, the stock of homes for sale held by contractors has remained substantially unchanged, and has even been on a rising trend since early 2022," the review states.
The problem is that presales oblige the developer to start work on a project, even though a large proportion of the apartments are actually unsold. Until the present crisis, this procedure paid off handsomely, and developers were able to finish selling off the remainder of the project quickly. The decline in demand, however, is slowing sales and could mean that developers will be left with large stocks of unsold apartments.
Many developers have recently launched marketing campaigns, offering such benefits as offsetting linkage to the construction inputs index, and some are even offering to participate in rent payments until the project is complete. These offers will probably turn into lower prices in the near future. The aim of many developers now is to sell as much as they can of their projects and get rid of unsold stock. The decline in sales numbers is such that many are likely to remain with stocks of apartments they have difficulty in offloading.
The market appears to be about to shrink and to undergo one of the worst periods in its history. There are those who believe that this is a good process for the industry, for if it turns out that developers get into financial difficulties and have to sell off their stock of apartments at bargain prices, this will benefit buyers. But history shows that it often happens that a buyer’s immediate profit turns into a painful loss in the long term. The apartment may be sold at a 10% or even 20% discount on the original price, but it quickly becomes clear that the associated expenses are greater.
A developer in financial difficulties gets into disputes with the contractors, bringing in train long delays in completing construction, a turnover in contractors, and poor build quality, since the developer will do everything possible to cut costs. Many deficiencies in construction tend to be found when companies are in difficulties, and even if the home is under warranty, the company cannot fulfil it, and the repairs fall on the occupiers. Many companies in this situation delay in registering the sale of the apartment in the Land Registry (Tabu), because of debts to the local authority and the Tax Authority. A transfer of ownership cannot be registered until the property is clear of such debts.
When receivers are appointed to these companies, things go from bad to worse, and there have been situations in which the receiver has informed homebuyers that they will have to pay over and above the price they were quoted, while the apartment they bought will not meet the specification to which the company committed. Sometimes the balcony is smaller, sometimes the storeroom is cancelled, sometimes the air conditioning is not installed. There have been cases in which the apartments were actually smaller in area.
The Ministry of Finance says that it is aware of the situation, but that it does not share the pessimistic outlook. "The government’s aim is to bring down home prices, but to keep building starts at their currently high level," a Ministry of Finance source said.
Published by Globes, Israel business news - en.globes.co.il - on December 28, 2022.
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