The Ministry of Construction and Housing published last weekend the table of construction costs by area and size of buildings, which reveal gaps of up to 84% in costs between the Tel Aviv area and the periphery. Beyond that, the weight of construction costs out of the total price of the apartment is the lowest in the Tel Aviv area, so this area is least exposed to sharp fluctuations in the construction input index; Reverse the situation in the periphery, where most of the price of the apartment is embodied in construction costs, and therefore it is largely exposed to the index.
Last week’s sale bill passed the first reading, stipulating, among other things, that a payment made by a buyer of a new apartment to an developer will not be linked to any index (unless the buyer is late in payments), except for the apartment construction cost component.
In order to avoid a dispute regarding the construction costs of each and every project, it was determined that these will be calculated according to the cost of building a square meter that will be published by the Minister of Construction and Housing, and this will be doubled in the area of the apartment purchased. Last weekend, the Ministry of Housing published the proposed regulations, to determine the cost of building a square meter and how to calculate the area of †‹вЂ‹ the apartment, to allow the implementation of the bill.
The regulations stipulate that if the apartment is sold pUnderground parking will be added to the apartment area of 35 square meters for the underground parking, and if the apartment is sold with an underground warehouse, the underground storage space will be added to the apartment area. This is because the calculation of the costs of underground areas is different from that of surface areas.
Huge gaps between construction costs in Tel Aviv and other parts of the country
Construction costs were determined based on work done by Paz Economics and Engineering, owned by appraiser Daniela Paz Erez. It conducted a comprehensive survey of 60 projects across the country, and acted in the form of the total construction costs of the surface areas located in the project in the total net living space. Construction costs include all the crafts required for the construction of residential buildings (from excavations and foundation to the finishing of aluminum, flooring and cladding) Home do not include components of planning, financing, overhead and of course entrepreneurial profit. At the same time, a theoretical calculation was made that relied on a palm calculator, which is accepted in the construction industry as a reliable source for measuring construction inputs.
Following a combination of the two methods, construction cost values were obtained for 4 areas: Tel Aviv, Jerusalem and the center, Haifa and the north and south, which are those included in the proposed regulations of the Ministry of Housing, which are supposed to accompany the new law.
The most notable finding in the table is the large gaps between the construction costs per square meter in Tel Aviv, and the rest of the country, and especially the Haifa and northern areas, which are the cheapest in this respect. 4.7 to 6 in Haifa and the north, hence the gaps are tens of percent and reach their peak in towers of 17 floors and more, where the costs per square meter in Tel Aviv are 48% higher to 84% compared to the other areas.
In the work, Paz Erez obeys, because the price per square meter usually decreases between the high-rise building categories (2-8 storeys) and the high-rise buildings (9-16 storeys) and rises again in the tower categories (17 storeys and above). A variety of reasons, including: repetitiveness in construction, construction complexity, construction standards, construction standard, etc., “she explains.
On the other hand, the construction costs in the underground are relatively similar throughout the country, ranging from NIS 2,600 to NIS 3,000 per square meter.
The new method is expected to benefit all home buyers, as today 100% of new apartment prices are linked to the construction input index. However, the large disparities in construction costs, in addition to the high variability of housing prices across the country, will put home buyers in different exposure to the risk of indexation. And as stated in the introduction – buyers of apartments in the periphery will be at the highest level of exposure, due to the large share of construction costs in the price of apartments, compared to the large share of the land component in the price of apartments in the center of the country.
How will the linkage mechanism work?
This interest is illustrated in a simulation we conducted in Globes. This included 6 cities, with new apartment prices based on transactions made in recent months and registered with the tax authority. We took in this simulation a theoretical 4-room apartment of 110 sqm, located in an 8-story building with underground parking.
In Tel Aviv and Ramat Gan, although the attached part of the apartment will be NIS 1.36 million higher in shekels; However, when it comes to the relative rate of the price of the apartment, it turns out that in Tel Aviv it is only about 20% of the price of the apartment that will be exposed, and in Ramat Gan it is 36%; In Be’er Sheva, construction costs are already two-thirds of the price of the apartment, and therefore the buyers are extremely exposed. In Afula, the weight calculated in the same apartment theoretically already reaches 81% of the price of the apartment (part of this is due to the combination of underground parking for calculation, although it is not in many places in the periphery, and even less in 8-story buildings). In this situation buyers will benefit relatively little from the new linkage mechanism.
On the other hand, a situation in which construction costs in Tel Aviv and its surroundings and in Jerusalem carry such a lower weight than the price of an apartment will increase the motivation of contractors to raise the prices of apartments in those places in advance.