Apartment prices are now falling, but for now it is a kind of correction after the big increase. Last year the prices went up by almost 20% and the year before by about 10%. The correction is requested and it is still only a correction. The prices dropped by about 5% and in order to be able to talk about a real drop there is still a long way to go. Few seem to expect a dramatic decline. Apartment prices are not expected to drop by 20%, not even by 15%, but 10% is possible, especially since half of the way is already done. 10% given expected inflation of about 4% per year, this is already a significant real erosion in apartment prices.
And yet the apartment has been distanced from hundreds of thousands of families. The situation today is that two thirds of the families have apartments. A third live in rent. Every year there is a need for 55 thousand apartments and this number is increasing. These are mainly young couples entering the market. The situation of these couples has worsened in a fatal way, their ability to buy an apartment outside of the lottery (price for the tenant-apartment at a discount) has decreased dramatically.
The increase in apartment prices has meant that it is necessary to bring much greater equity to purchase an apartment. An apartment that cost NIS 1 million a decade ago and NIS 1.6 million two years ago, now costs NIS 2 million. The minimum equity required to purchase a first apartment is 30%, which means you need NIS 600,000 for this apartment compared to about NIS 480,000 two years ago. Apparently not terrible – but it is not accurate. Need much more. Here is the explanation:
The more important figure is the mortgage repayment. When you buy an apartment, you have to calculate the current repayments in the future, they have to be in line with the family’s current income and this is also a figure that the bank checks to make sure that the repayment will not be difficult-impossible for the borrowers. This is much more important than the initial equity in purchasing a first apartment, which is usually financed with a 70% mortgage.
The increase in apartment prices in parallel with the increase in interest rates in the economy and the increase in mortgage interest and the current mortgage repayment, caused the mortgage repayment to increase 2 times in the last year and a half. In fact, if we take a couple with a net income of 13-14 thousand shekels per month (together), then a year and a half to two years ago with a capital of 480 thousand shekels, they would have taken out a mortgage of 1.12 million shekels to purchase an apartment of 1.6 million shekels and assuming that it was an average mortgage for 30 years, his repayment was NIS 4,500 per month.
NIS 4,500 per month out of a net income of NIS 13-14 thousand is reasonable. But, look what happened to this couple today. The apartment is already 2 million shekels, the equity is 600 thousand shekels – let’s say the increase in capital is 120 thousand shekels, he can bring. The problem is with the mortgage and especially with the repayment of the mortgage. The couple has to take out a mortgage of NIS 1.4 million, the mortgage repayment is over NIS 8,000 a month. Here is the big story. This couple can no longer afford the mortgage repayments. The increase in repayment is also due to the increase in the value of the apartment and correspondingly an increase in the amount of the required mortgage, but mainly due to the increase in interest.
The meaning is simple – there is no chance under these data to purchase an apartment. Then you understand a simple thing: it is not the equity that determines the ability to buy an apartment, but the monthly repayment. You need to check what the repayment capacity is and from there determine the apartment that can be purchased. Let’s say the ability to repay has not changed – NIS 4,500 per month.
Then when we compare the situation of the young couple today with the situation two years ago, under the assumption that he can pay NIS 4,500 a month, we will find that if two years ago he needed capital of NIS 480,000, now he needs capital of NIS 1.12 million and then a mortgage of NIS 800,000 will express Reimbursement of NIS 4,500 per month. This couple needs another NIS 720,000 to purchase an apartment (and we used conservative estimates), which means a capital 2.3 times larger than it was two years ago. This is the real increase in the price of the apartment.
Let’s sort it out. An apartment that cost NIS 1.6 million two years ago and today costs NIS 2 million. You see a price increase of 400 thousand shekels, in practice it is 720 thousand shekels. The young couple who buys the apartment should take into account that if two years ago the capital they had to put up for purchase was NIS 480,000 and then the monthly repayment was NIS 4,500, today it is a capital of NIS 1.12 million and a repayment of NIS 4,500.
It doesn’t just keep couples and families away from buying an apartment, it actually eliminates their chances, especially against the background of the understanding that the interest rate won’t go down in the coming year either. The big problem is that even if apartment prices fell this year, which is expected, the contractors are now slowing down and building a little. They actually create a shortage that will later be reflected in price increases.
The state needs to take responsibility for the supply of apartments, and although last year the amount of construction starts was for the first time after many years above the demand, in recent months, there has been a big drop in construction starts. This means that in another year or two, a shortage will be felt, it means that in the areas of demand the shortage will be felt even faster. As long as the Ministers of Finance and Housing and Construction do not come up with a comprehensive plan to solve the situation, there will be a problem. Prices will not decrease over time if demand exceeds supply.