Iron price hike has added NIS 30,000 to building costs

Data indicates the real estate industry in Israel might be slipping into a recession.

By JOHN BENZAQUEN
construction good 88 224 (photo credit: Ariel Jerozolimski)
construction good 88 224
(photo credit: Ariel Jerozolimski)
The real estate industry in this country is going through difficult times. The fall in housing prices marks the beginning of a drop in demand for real estate, as is evident from the latest figures published by the Central Bureau of Statistics. The data indicates the industry might even be slipping into a recession. Insofar as the industry may be confronting hard times, however, it is entering a period that can be described as "difficult with big layers of fat." Over the past two years the industry experienced a big boom, a reaction to the seven lean years that preceded them in what was the longest real estate downturn in the history of the state. In this interview, Nissim Buvlil, president of the Association of Contractors and Builders in Israel, discussed the problems confronting the industry in the years ahead. "It is true that the industry had two very good years, but you must realize that most developers plow back their earnings into the business, they buy land, they invest in construction, etc," Buvlil said. Yet to judge from figures published by the Central Bureau of Statistics the developers are not investing much of their earnings into the "business," because housing starts are down by 14 percent. Buvlil blames the fall in housing starts on the Israel Lands Administration. "They own 95% of all available land in Israel and they do not market sufficient land for building purposes - especially in those areas of the country where demand for housing is strong. The result is a shortage of building land and a fall in housing starts," he said. The drop in new construction may be justified by the fall in demand - 6.1% in May - but as things stand this is the least of the sector's problems. The biggest headache for the industry is the rise in commodity prices, which has had a dramatic effect on building costs. Buvlil is very worried by the rise in the cost of building inputs. "The price of iron, a very important element in the building trade, has increased by 115% since October of 2007. "The price of tar and of cement have both risen significantly, as has the price of diesel oil, which is used extensively to power the heavy machinery used in the building trade. The rise in the cost of iron alone has added an extra NIS 30,000 on average to the cost of an apartment," he said. "Until now we have not passed on the extra costs to buyers, because demand is weak as it is. "The increase in the price of iron and other building inputs has had dramatic effects on the cost of building infrastructures, where the cost of iron, tar, cement, etc as a percentage of the total costs are much higher. "Let me give you an example. On January 1, the cost of constructing a stretch of road one kilometer long and 10 meters wide was NIS 180,000. By June of 2008 it had escalated to NIS 340,000 - a rise of 90% in 18 months!" he said. One of the more marked features of the local real estate industry is that it has become international. Many large development companies such as Gazit, EFI and Elbit are more involved in building projects outside Israel than in building them here. "The reason they decided to try their luck outside Israel is because it is difficult to make money in construction in this country. The bureaucratic impediments are unbelievable. It may take up to 10 years to get the necessary authorization for a building project in this country. "In these circumstances I quite understand those who prefer taking their capital and expertise overseas," Buvlil said.