Inflation in the coming year is expected to be moderate from its current level despite a number of changes in tax policy which are expected to contribute to the rise in the index.
The consumer price index for November fell by 0.1%, a low rate of change relative to the consensus forecast (which stood at 0.0%), this is the second month in a row. In the last twelve months (November 2021 compared to November 2020), the consumer price index rose by 2.4% (compared with 2.3% in the previous month).
The November index recorded a number of surprises. The clothing and footwear section, which tends to rise in November in general due to the measurement of prices at the beginning of the winter season, has dropped unexpectedly, and this is the second month in a row that this section has been relatively low compared to change rates in previous years. It can be assumed that the relatively warm weather that prevailed in the country until the end of November played a key role in explaining the low indices. The subsection of accommodation, vacations and trips, which reflects the prices of overnight stays and accommodation in the country, also fell by a sharp rate relative to November, possibly against the background of the advance discount that occurred every year in December, in one month. On the other hand, the subdivision of tenant-owned housing services (which reflects the prices of rents in new and renewable contracts) has risen, in contrast to the negative rates of change in this sub-section in November in previous years.
Apart from these, it should be noted that car prices, reflecting the prices of new and used vehicles, have risen above 1% for the fourth month in a row, and now the annual growth rate of this item stands at 6.3%, the highest annual rate recorded since February 2010. Recently, this is probably due, among other things, to an increase in demand for vehicles against the background of the consequences of the corona (disruptions in public transport services, fear of congestion in public transport) and the background of disruptions in the production of new cars around the world.
It is also interesting to note that according to CBS estimates, the prices of disposable utensils rose by 51% in November, following the increase in the tax rate on disposable utensils made of plastic, so that in our estimation this increase was a significant contribution of almost 0.1 percentage points to the November index. It should be emphasized that the government’s tax policy is expected to make a real contribution to the rise in the index in the next two months, so that in December the tax increase on the purchase of a second apartment or more is expected to contribute to the rise, and in January, the tax on sugary drinks (With an emphasis on hybrids) are also expected to contribute to the rise in the index.
Looking forwardIn the next 12 months, the rate of increase in the consumer price index is expected to decline from its current level (see chart), against the background of a number of key factors and assuming a scenario in which the corona crisis does not cause closures / significant reductions in global and local activity. First, a significant moderation in the rate of increase in commodity prices, with an emphasis on production inputs and consumer products, and even a decline in energy prices. Second, the rate of growth of domestic demand moderated in light of the dissipation of the effect of demand accumulated during the period of restrictions on the economy and the various closures. Third, similar to previous years, the shekel continued to strengthen against the basket of currencies. Finally, various government policy moves are expected to reduce the cost of living, while affecting the medium term.
There is a record volume of construction starts in 2021 while the rate of completion of residential construction continues to falter
CBS data show that the volume of residential construction starts in the third quarter of 2021 amounted to about 13,000 dwellings and in the last four quarters reached about 56,000 dwellings (seasonally adjusted data), about 2% more than the rate of construction starts in the previous year. In light of this and given the high rate of issuance of building permits (about 63,000 in the last year), it seems that in 2021 the total number of construction starts will reach a relatively high level of about 60,000 apartments and possibly even more (level of beginnings). Nearly 60,000 dwellings have been registered a few times a year over the past decade. This is a similar construction volume or slightly higher than the housing needs of the economy, which we currently estimate at about 55,000-60,000 dwellings per year.
The volume of high construction starts seems to reflect the maturation of planning processes that took place several years ago, such as: a high rate of marketing of state-owned residential land in 2017-2018; And an increase in past years in the volume of planning inventory of urban renewal projects (construction starts as part of urban renewal have increased in the past year by about 13% compared to the previous year). The fact that these processes matured only in 2021 reflects the much slowness that characterizes the planning and licensing processes in Israel, relative to the developed world.
The completion of residential construction, on the other hand, continues to be significantly lower than its level on the eve of the corona crisis, as well as the level needed for the needs of the economy. The scope of construction completion in the third quarter of 2021 reached only about 11,000 apartments and in the past year amounted to about 46,000 apartments, compared to the construction completion of about 53,000 apartments in 2019, on the eve of the Corona crisis (see chart). Against the background of the decline in the completion of construction, the volume of active construction of apartments increased and in the third quarter of 2021 reached a record level of about 139,000 apartments.
The decline in residential construction completion is consistent with additional indications of the construction industry’s difficulty in recovering from the effects of the corona, such as a high rate of job vacancies in the industry (about 6.5% versus about 5.1% in the economy as a whole, as of October 2021). This, among other things, against the background of the difficulty of increasing the labor force imported from abroad, given the waves of morbidity in the world and in light of restrictions on foreign arrivals into Israel, and in view of the difficulty of recruiting workers expelled 2021 onwards). The CBS Business Trends Survey shows that even a shortage of equipment and raw materials now constitutes a more significant limitation on activity in the construction industry relative to the past, in light of the global shortage of supply of various building materials. These processes are reflected in a steep rise in the past year in the construction input index (about 5.8% in the year ended November 2021).
In summary, the data show that the pace of residential construction is still struggling to return to its level on the eve of the corona crisis, in a way that is hurting the pace of construction completion. At the same time, assuming that the current increase in corona morbidity will not lead to exacerbation of disruptions in the activity of the construction industry, we anticipate that the completion of residential construction will gradually recover in the coming quarters. This coincides with the renewed increase in the volume of investment in residential construction, which has been recorded in the economy since the second quarter of 2021.
Despite the rise in construction starts, record demand for housing has led to a decade-long peak in the rate of rising house prices
Despite the current rise in construction starts, the concomitant increase in demand for the purchase of housing is even sharper. This is reflected in the requested amount of new dwellings (dwellings sold + dwellings not for sale, such as “Build Your Home” projects and purchase groups), which reached a peak of approximately 17,500 dwellings in the last three months (August-October 2021). The demand in recent months has “jumped another step”, among other things in light of the onslaught of many real estate investors on apartments, in an attempt to make ends meet and purchase transactions even before the purchase tax increase on investors, which took effect on November 28.
Excess demand in the housing market leads to a continued acceleration in housing prices. According to the CBS ‘monthly housing survey (which is not included in the consumer price index), the annual rate of increase in housing prices reached 10.3% in September-October 2021, the highest annual rate recorded in the economy in about ten years (see chart). In our estimation, in the coming months a continued accelerated rise in house prices is expected, but later in 2022 a certain slowdown in the rate of price increase is expected. This is in light of the expectation that the demand for the purchase of apartments has fallen from the current record levels, among other things in light of the negative impact of the increase in the purchase tax on the activity of investors in the market.
.