Housing price falls are steeper than they seem

The price of new apartments on the free market in Israel have fallen 5.8% in four months, the equivalent to an annual fall of 18%, and a serious warning sign for the entire real estate sector, according to figures published by the Central Bureau of Statistics on Friday. This come alongside a monthly decrease of 0.2% in the first overall monthly index of apartment prices of 2023. At the same time, rental prices continue to rise and fuel further increases inflation and interest rates.

As interest rates continue to rise Israel Builders Association president Raul Srugo said, “The Israeli government is absented itself from the economic field and the housing market, just ahead of the peak of a crisis we have not yet experienced. The responsibility lies with the state’s leadership to provide incentives that will not stop building starts because of the tremendous shortage of apartments and will help the homeless. As a representative of the industry, I tell you that if interest rates continue to rise, many contractors will lose their economic independence and some will collapse. This is an event that can affect the pocket of every citizen in Israel with a drop in the ability to build and a jump in housing and rental prices.”

This is a desperate, resounding and exceptional response by one of the strongest economic organizations in the country, while the Central Bureau of Statistics data are also exceptional, and accurately reflect the tough atmosphere that prevails in the construction industry, which is currently in the midst of a heavy crisis. Is Srugo exaggerating by warning of a “crisis” that is yet to come? Not sure. Several months ago “Globes” analyzed the emerging crisis in the construction industry, and came to the conclusion that a crisis is emerging of the like not been seen in Israel for decades.

These concerns are now clearly being translated into numbers. Prices of new apartments sold on the free market (excluding the Mechir Lemishtaken program)) between October and January, fell by 5.8%, the Central Bureau of Statistics reports. These data are published on a monthly basis, but the Central Bureau of Statistics does not compile then into an ongoing index. The official housing price index of the Bank of Israel, which includes the apartments sold in the Mechir Lemishtaken program recorded a fall of 2% in these four months, so the Mechir Lemishtaken program apartments hide the true dynamics of the price drop.

The annualized 18% fall in apartments on the free market supports the results of Israel Land Administration land auctions, which fetched prices at less than half of the appraiser’s estimates. Developers who anticipate a fall in apartment prices in the coming years, take this into account in the land prices.

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Returning to the overall housing prices index for January-February 2023, which fell 0.2% – following the large falls in the prices of new apartments – this is a figure that did not surprise anyone. More than the rate of decline, the addition of the “minus” is the most prominent thing in the current index, but it is something that is more symbolic. But with only a very small number of deals currently being completed, with private sellers reluctant to accept low prices, this distorts the real picture in the market.

What is more worrisome is the rental market. Rents, excluding public housing, rose 0.5% in March, and the index including rents and home maintenance rose 0.7% last month.

Another factor that is troubling and worrying is the reaction of politicians who take credit for the price falls as the outcome of government policy rather than a recession in the sector. Minister of Finance Bezalel Smotrich sees the price falls as positive and due to the government encouraging an increase in housing supply. Former Minister of Construction and Housing Zeev Elkin said, “We said that in 2023 the increase in housing prices would be curbed and here it is.” Current Minister of Construction and Housing Yitzhak Goldknopf is insisting that another 100,000 new homes be marketed this year including 30,000 in discounted programs.

These responses show why Srugo believes that the government has absented itself from the housing market. In a situation in which prices are falling slightly and interest rates are rising while rents are going up even faster, everybody is suffering: development companies, the homeless, and homeowners who took mortgages. The situation will not end well.

Published by Globes, Israel business news – en.globes.co.il – on April 16, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.