The people of the Ministry of Housing and Construction were surprised yesterday when the minister in charge, Zeev Elkin, revealed in the Knesset a move that was just beginning to brew in the corridors of the ministry.
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The intention is to limit the linkage of the price of the apartment to the index of construction inputs. This index has risen by 5.8% in the last 12 months. It should reflect the cost of the basket of products and services used to build an apartment.
Developers tend to attach the contract of sale to this index, so that payments for the purchase of an apartment that are spread over years will be adjusted to increase the cost of construction. The goal is to protect developers from erosion in the value of apartments and their profitability. This protection is also required by the financial system that is invested up to the neck in these projects and wants to make sure that its investment does not go down the drain.
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Building
(Photo: Uriel Cohen)
Until the outbreak of the corona crisis, it was common to estimate that this index would rise at a rate of about 3% -2% per year. But in the past year the prices of raw materials have risen – in all inputs, from cement, through irons to the wood used for construction. This is due to problems in global supply chains and a drastic increase in the cost of sea transport. Along with them, the index also jumped, and as a result, payments for the apartments rose. Anyone who bought his apartment at a certain price discovered during the year that he would have to add tens of thousands of shekels more until he repaid his debts to the construction company.
The problem that MK Bezalel Smutrich posed yesterday in a question he addressed to Elkin is that the index is linked to the price of the apartment, even though there are components in the price that have not risen in price. In his address to Elkin, he explained that “the construction input index affects contractors’ expenses only in relation to the cost of construction only and has no effect on the land and profit component that make up the majority of the apartment price, so there is no justification to link the entire apartment price to the input index.”
Roughly speaking, the price of an apartment consists of the cost of the land on which it was built, the cost of construction, and the entrepreneurial profit. Smutrich’s argument is that the land the developer has already purchased, it will not become more expensive during the construction period, so it is not fair to allow the construction company to link this component to the index. According to Smutrich, the profit component should not be linked to the index either, since it too is not directly affected by construction costs.
Elkin, who prepared for this inquiry ahead of time, revealed in the Knesset that his ministry is working to promote legislation that will allow only the construction costs component to be linked to the input index. A Calcalist survey shows that this idea did come up in the corridors of the office, but it is preliminary, immature, and should be part of a broad reform of the Sale of Apartments Law.
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MK Bezalel Smutrich. “There is no justification for linking the price of the entire apartment to the input index.”
(Yoav Dodkevitz)
The idea is that the supervision of this issue will be entrusted to the Commissioner of the Sales Law, who by virtue of his role supervises the sales contracts that contractors sign their customers. The idea is to do this by temporary order or temporary regulations. The main goal indicated by the Ministry of Construction and Housing is to reduce the gap between the price of the apartment on paper, on the day the contract was signed, and the price that buyers actually pay following the rise in the construction input index.
Disagreement with the developers will delay construction
Because this idea has only recently come up a lot of questions and problems are floating around, it is still unclear how they will be dealt with in the Ministry of Construction, so it is difficult to extend now what the chances are that this move will actually be implemented in the end. This reform involves a great deal of regulation and supervision, which are not suitable for a free market and it is possible that instead of doing good with the market, it will actually harm it.
A major problem that the Commissioner of the Sale Law will have to deal with is how to separate the price of the land and the entrepreneurial profit from the price of the apartment. In the case where the project is built on state land, it is possible to know how much money the developer paid to the Israel Land Authority. But even in this simple case disputes will arise over the cost of construction.
This issue is a pillow for disputes and disputes between developers and regulators, so instead of speeding up construction a procedure may be created that will delay it. A scenario in which each party – the developer and the regulator – summons an appraiser on his behalf to present the time of construction costs is not unfounded.
More complicated cases are in projects that are built on private land. Although fresh deals are reported to the tax authority, it will be difficult to extract the cost of land purchased many years ago. Even if a solution is found, it involves bureaucracy and cooperation and information between authorities.
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Housing Minister Zeev Elkin
(Kobe Cuenx Fellow Shaal)
Elkin assumes that developers bought the land so it will not become more expensive. But he did not take into account that often they pay only a certain percentage of the value of the land and the rest is paid by the bank. The contractor’s debt is linked to an interest rate that may rise as the prime rises. If the land component is not linked to the construction input index, there will be no compensation to the developer in the event of a rise in interest rates.
In addition, real estate developers are building on the increase in the price of apartments they have sold in line with the rise in the input index. Imposed on the purchase of an apartment and especially purchase tax.
However, there is an advantage in that prices will rise when signing the contract of sale and not at an unknown pace and time, because in such a situation the margin of uncertainty of the buyer of the apartment is reduced. The apartment may be a little more expensive, but the buyer can extend how much money he will really need.
Big benefit to the center and small to the periphery
The move by the Ministry of Construction and Housing will provide a significant benefit to buyers of apartments in the center, but its weight in the periphery is small. This is because land prices in the Gush Dan area have soared in recent years, and their weight in the price of the apartment has increased as well. While the gaps between the cost of construction in the center and the periphery are small, if there are any such gaps. For example, in the Sde Dov area, the Israel Land Authority sold plots of land for a key of about NIS 2.5 million per apartment. Eliminating the linkage of this part to the input index, which rose by almost 6% in the past year, could save buyers of apartments there about NIS 200,000. On the other hand, in Ofakim, plots are sold according to a key of about NIS 300,000 per apartment, hence the abolition of the linkage will save buyers about NIS 33,000.
Finally, contractors with whom we spoke claim that the construction input index does not really reflect the price increases, and therefore demand that as part of the same move, the index be updated as well. “For example, if a tree cost me NIS 1,200 a few months ago, now it costs NIS 1,750, it has risen by 50%,” says the CEO of a well-known company. “Last year I paid NIS 2,400 per tonne of iron and now NIS 3,500. When the index goes up I feel it does not close all the execution costs for me. Elkin’s move wants to shift all risk to the entrepreneur. But all the components of the construction input index need to be rethought. “
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