The dramatic change in the construction input index, which was revealed in Globes, is arousing great interest in the real estate industry. What is this index in general, how will the move affect housing prices and how may contractors be affected? Globes is making order.
What is the Construction Input Index?
The apartments we buy of course include countless parts and details that cost a great deal of money to those who build them for us. The concrete, the irons, the wood, the glass to the wages of the construction workers and more and more. The price of all this does not necessarily depend on the contractor and he himself does not know how much it will cost him over the long life of a project – it will sometimes take many years between the date you signed to buy an apartment on paper and the date you receive the key. Therefore, in order to protect himself (and us – because no one wants his contractor to give up in the middle of a project and run away), the prices of new apartments are usually linked to the construction input index, which consists of countless details that together include our dream apartment.
And how dramatic is that?
It is, that for quite a few years the index has been relatively calm, like the dormant inflation, however in the last year it has raised its head following the jump in inflation and transportation prices around the world. Just last November, the residential construction input index climbed 0.5% and completed an annual increase (November to November) of 5.8%.
To clear the ear: The person who owes the developer, from whom he bought the apartment, NIS 2 million, saw within a year how the de facto apartment price increased by NIS 116,000 – and gave him the dream of leaving money aside for a small upgrade of the kitchen and bathroom before entering the apartment. .
Is this linkage mandatory?
No. This is a condition that appears in the contract with the developer from whom you bought the apartment “on paper”, and it is definitely negotiable. However, since the developer is indeed exposed to the unexpected change in input prices by the time he hands you the key, you should keep in mind that if he voluntarily waived the linkage, he probably found a way to add those costs elsewhere, plus risk and uncertainty. How much will the index cost. Another option is to pay more money in advance and without the headache of the linkage, for the lucky ones who came to purchase equipped with cash.
In addition, the input index does not include the land component, but the linkage paid by the buyer is for the entire amount of the apartment, of which a significant part – over half in Gush Dan – is the part of the land. The one that was purchased a long time ago, and there is no reason for us to pay a linkage that refers to the prices of iron and wood in the world.
In any case, it is worth noting that you sign a contract linking the price of the apartment to the building input index no later than the date of receipt of the occupancy form (“Form 4 issued by the municipality”) – and not until the date of receipt of the key. Sometimes it is a gap of long weeks that can bounce you the price of the apartment by many thousands more.
What change is this now?
The Ministry of Housing hears the sigh of buyers of new apartments against the construction input index, and they are well aware that the cost of construction itself – which has indeed risen significantly in the past year – is not such a big part of the cost of most apartments in Israel. In the boiling center area, the land component occupies a share of about 50% and even more than the price of the apartment and the entrepreneurial profit (the coupon that the developer cuts at the end of the road) already reaches tens of percent.
The ministry concluded that there is no justification for those parts to be linked to the construction input index and they are working to neutralize them from the calculation. However, due to the great complexity, they did not raise the flag and did nothing until the issue came up this week in a Knesset debate, as part of a query submitted by MK Bezalel Smutrich.
Will this happen soon?
As mentioned, the distortion in the calculation of the linkage has been known for quite some time, but the complexity is great and it will be very difficult to implement the move. The land component and entrepreneurial profit varies from time to time and from region to region and enterprise to entrepreneur, and it will be very complex to calculate at what rate the apartment will attach the construction inputs. It is not even clear whether this is a task that will be assigned to the Central Bureau of Statistics, the government body that updates monthly what happened to the construction input index, or to the Ministry of Housing itself, perhaps through the Registrar of Contractors, a much more stressful political body.
Will it apply retroactively? Is the move in the real estate industry welcome?
It’s too early to know, but the chances of it going backwards are very low, especially of course in the face of opposition from the contractors and developers themselves.
In fact, the contractors are not waiting and they started this week trying to thwart the whole move. Raul Srugo, president of the Contractors Association, has already announced that this is an “unfortunate move that will raise apartment prices.” It must be admitted that for many years the contractors have been complaining that the construction input index does not reflect the actual increase in construction costs, especially in light of the changes in the industry itself (more aluminum for example in each apartment), a distortion that is much higher.
The contractors demand that if we already go for such a move, then we must check whether the weights of the index are still correct (for example, that 43% of the cost is workers’ wages). Such a test is of course also complex and will take a long time. Therefore, a decision on a significant change in the composition of the index in parallel with a change in the linkage components is sufficient to stick the move for a long period.
So what will this do to apartment prices?
Apartment prices are mainly determined in the market of supply and demand, after the developer (and the banks that finance it) video of course that the price easily bypasses the construction costs themselves. At the same time, eliminating indexation will of course increase the level of risk of the execution contractor, and he will have to somehow embody this in the price. And yet, certainty is a critical component in any transaction. Even if the threat of the contractors persists and the initial price of each apartment rises slightly because of the same risk component passed to them, it is not certain that the buyers of the apartments made a bad deal.
Bottom line, the price they will actually pay by the exciting time of handing over the key will be lower – thanks to much less linkage to the construction input index.
What about urban renewal projects?
Urban renewal projects – TMA 38 and construction clearance, mainly illustrate the complexity of neutralizing the land component and calculating the cost of construction in each project.
The developer who is connected in the deal to the old tenants actually receives land from them for construction, in a kind of combination deal in which they will return to new apartments for which he will build “for free” (expansion, strengthening and upgrading the old building or demolition and reconstruction) and he will sell the other apartments The price for construction inputs. The difficulty of extracting and weighting the land component, which they transferred to the contractor, versus the construction cost component for old and new tenants makes clear how difficult the plans of the Ministry of Housing will be to reach a final and final alignment.