What happens when the contractors' fear meets the buyers' urge? | opinion

The sales figures for the last two months indicate a very high sales rate of new apartments, unprecedented benefits from the construction companies and a return to the trend of price increases.

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Since the corona virus, the market has been characterized by a market that ranges from tragedy to euphoria and God forbid, when the question is currently being asked, where do we go from here? For tragedy or euphoria? Do the buyers take an option on the developer or, conversely, does the developer take an option on the buyers?

Nir Shmol – CEO of the Urban Development and Renewal Company and CEO of the Shanir Company: "A foreigner who arrives in Israel these days, will find it hard to believe what he hears and what he sees, the Israelis flock and storm the sales offices despite the war, despite the interest rate, and despite the large deficit in the budget and the high costs of the war and taxes that will follow them in the coming months."

According to the data of the Central Bureau of Statistics between the months of December 23 and February 24 approximately 21,580 apartments were sold, compared to a fifth of this amount between the months of September and November 2023. According to the information that I have the rate of sales in the months of March April the amount of sales even increased significantly and in my estimation is approaching the monthly average In the last decades, for the first time since the war, the stock of new apartments left for sale, which reached a record of 67,980 unsold apartments, decreased in these months after a long slowdown in the rate of sales which, as mentioned, led to an all-time high.

The question is why and how does this happen? It is important to understand that the Israeli real estate market in recent decades has been characterized by price increases ranging on average between 4-15 percent per year, when the dramatic increases in the market happened after the Corona period, which even reached an annual increase touching 20 percent in 2022.

Since the establishment of the new government and the legal reform that it sought to carry out at the beginning of its path, along with a consistent increase in interest rates in light of the inflation data that the statement (after the exit from the corona restrictions) the rate of apartment sales gradually decreased (mainly in the central region) when the war that broke out on 7.10 led at the beginning to a complete paralysis of the market in all the regions in Israel.

This resulted in unprecedented promotions by the contractors with benefits not seen in the last twenty years, including unusual payment terms, exemption from the index and contractor loans whose interest and linkage are paid in advance by the developer, all with the aim of selling apartments and not getting stuck with a large inventory where the interest rate is high and the developer does not meet the conditions of the loan and is forced to transfer more Equity at a time when it is difficult to raise it.

In the first months of the war, this did not help to increase the rate of sales, both in light of the great shock in which we were all fed up from the terrible massacre on 7/10 and also in light of the extensive recruitment of reserves which reached at its peak about 300 thousand conscripts, both men and women. Many entrepreneurs offered and offer, as mentioned, unprecedented payment benefits, pay 5/7/10/15 or 20 percent when signing the contract and the balance close to occupancy along with an exemption from the index.

Starting in January, we began to see a gradual return to the sales offices, and as I mentioned in the months of March and April, the dam was broken and the sales volumes in these months resemble the sales volumes after the Corona period when the Israelis stormed the sales offices and apartment prices rose by 20 percent per year as mentioned.

But why might this time be different?
First of all, Israel is in a war whose end is not yet in sight. The cost of the war is currently estimated at 1.1 billion shekels per day, a cost that brings us to a price that is so far astronomical in the hundreds of billions of shekels, and if we take the initial cost of the massive mobilization of the reserves and the loss of output, according to the estimates, we are at a huge amount and the cost of war so far is over 500 billion Shekel (equal to Israel's annual state budget) As a result of this, in the coming months the state will be forced to raise taxes, including VAT and direct and indirect taxes, in order to finance the war expenses and reduce the "hole" in the budget, which currently stands at a new record of 117.3 billion shekels, the highest in the state's history.

Secondly, the main part of the market, as mentioned today, is conducted through the benefits of unprecedented payment conditions, which means that investors, housing improvers and the homeless do not face the need to take out a mortgage under the existing market conditions and the high interest rate because all future payments with the exception of the equity required in the contract are paid close to delivery and there is no need at the moment to take out a mortgage, since all The financing is done by the developers either through equity to finance the execution or alternatively through contractor loans that are paid by the buyer, however the interest and linkage are paid by the contractor in advance to the bank.

There is a decrease in construction starts, an increase in construction prices, and a great fear of contractors to open new projects (until about two or three months ago), the stock of unsold apartments is gradually decreasing when the birth rate in Israel is the highest in the OcED countries and the need for apartments in Israel is increasing compared to the annual average of the start of the construction of 50 thousand apartments on average per year.

That is, most of the buyers in the market today do not face the need for regular payments throughout the construction period and when the expectation of everyone in the market is that the prices in four years will be higher in favor of investors who will seek to realize their investment, the housing improvers who do not currently need to sell their apartment until almost moving into the new apartment they purchased and The housing that does not have to pay rent today alongside current mortgage payments.

The perception of the buyers in today's market is that the prices will continue to rise, therefore it is right to buy an apartment at the moment when there is no need for completion and in fact the customers feel that they are taking an "option" on the developer and therefore at the moment of exercise they will be able to sell the property to a third party, complete the deal or sell the property they own and through The sale to finance the purchase.

It is important to consider what will happen if the prices in the market do not rise in 3-4 years and at the moment of delivery the customer will have to complete the transaction / get a mortgage / sell a property he owns and what the economic conditions in Israel will be during that period.

What are the forces acting on the market these days?

  • An economy at war.
  • Real estate sales rate is increasing.
  • An uncertain future from a political / security / political point of view.
  • Anti-Semitism is increasing in the world causing Jews and former Israelis to recalculate their course.
  • high interest rate.
  • Aggressive financing deals for entrepreneurs alongside unprecedented benefits and exemption from indexation.
  • A budget deficit and an expected tax increase until the end of the year.
  • The increase in the prices of the execution in light of the threats and the Houthi attacks in Yemen, the Turkish sanctions and the increase in the prices of raw materials and labor wages alongside a decrease in the number of workers coming to the land of Judea and Samaria.
  • A new trend of rising apartment prices after a year and a half of market stagnation and slight price drops in some areas.
  • A decrease in the inventory of construction starts in Israel and contractors who are considering whether to go to sales or wait.

In conclusion, uncertainties in Israel at the moment in light of the ongoing war, not knowing how the situation on the northern border will end and the impact of the war on the economic, political, security and political situation in Israel makes it difficult to determine whether we will see ongoing euphoria or an impending tragedy in the Israeli real estate market. We must all remain optimistic.

The author, Nir Shmol – CEO of the Urban Development and Renewal Company and CEO of the Shanir Company


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