High prices, low availability

The price of real estate rose from a national average of NIS 640,000 for an apartment in 2000 to NIS 1.1 million in June of this year.

October 15, 2011 16:02
4 minute read.
View of Jerusalem construction project.

Jerusalem construction 311. (photo credit: Courtesy)

The real estate industry in this country is going through turbulent times. After three years of hefty increases, prices have stabilized.

After years of acute shortage of building land, the Housing Ministry and the Israel Lands Authority have increased the sale of building land. And after years of silence, the government is stressing the need to bring down prices, especially at these times of social unrest.

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The current social unrest was caused in great part by the hefty real estate prices, but why did housing prices rise so sharply? What were the price trends in the past 10 years? Nissim Bublil, president of the Association of Contractors and Builders in Israel, says that real estate prices have risen sharply since 2008.

“The price of real estate rose from a national average of NIS 640,000 for an apartment in 2000 to NIS 1.1 million in June of this year. This is a substantial increase, but one must deduct the rise in the CPI during this period and the hefty rises in the last four years.

According to figures published by the Housing Ministry, ‘real’ real estate prices during 2000-2008 actually fell, while ‘real’ prices during the last four years rose by nearly 35 percent.

The hefty rise in real estate prices occurred since 2008, and this is due to the shortage of housing. In contrast to the increase in prices in the US and Europe in the period prior to the sub prime crisis which were speculative in nature, prices in Israel rose because there was not enough housing to go around,” he says.

And that was the crux of the problem – an acute shortage of housing.

Since 1998, annual housing starts have fallen below the annual number of new households being created in Israel. In 2010 the number of new households and the number of housing starts were equal, but in the preceding 12 years annual housing starts were below the number of annual households created that year.

Consequently, there is an accumulated shortage of 70,000 dwellings.

The government wants prices to go down, but as Bublil, explains this is easier said than done because building costs make up only 31% of the price of the apartments. Everything else is beyond the control of the developer.

“The price of land makes up 34.1% of the cost, and most of the land is sold by the government through the Israel Lands Authority. An additional 51.9% is made up of taxes. This leaves the investor with a gross profit of only 13.0%, part of which he has to put aside to buy land, which is the grassroots of any real estate developer.”

One must take into account that the process of planning and executing a building project takes many years, and time is money.

Despite the fact that the price of real estate has risen sharply and with it, profits, the amount of money needed to buy land is increasing all the time.

The developers need a profit margin of at least 13% to survive.

According to Bublil, the increase in real estate prices is affecting the developers and contractors.

“The biggest problem we have is our inability to build less expensive apartments because when large segments of the population cannot afford the prices, it means our customer base is smaller, and that is not good for business. Many of the reasons for the high real estate prices are government motivated and from their point of view, they are perfectly logical. The Treasury is right in that it tries to squeeze as much money as possible from the real estate industry to finance government activity. The Israel Lands Authority is acting correctly when it wants to charge the highest price possible for the land it is selling developers. The planning authorities are acting correctly when they check and double check each project. The environmental groups are trying to protect the environment, and the defense minister wants every shelter to have a built-in filtering system.

All these regulations have their reasons, but they add hundreds of thousands of shekels to the price of an apartment,” he explains.

The government is trying to overcome the shortage of housing by increasing the land being made available to the developers. But this is not having the desired effect for two reasons: lack of bank credit financing due to government regulations and a shortage of construction workers. In the second quarter of 2011, there was a drop of 2.5% in housing starts because of that, and housing completions are lagging behind housing starts because of the shortage of trained construction workers.

As Bublil explains, “There is a shortage of 20,000 construction workers. For the past 40 years, the majority of construction workers were Palestinians and foreigners. At these times there are only 5,000 overseas workers. We have an agreement with the government that at any given time we will have permits to employ 8,000 overseas construction workers. But this agreement is not being implemented because the government has not agreed on the country of origin of these workers. But even if these 8,000 were miraculously to materialize, there would not be enough. The prime minister wants to increase housing starts by tens of thousands a year, and for that we need more construction workers. It cannot be done with the available workforce,” he says.

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