2024-02-17 06:46:00
The housing price index rose by 0.7% after months of declines and is a big surprise. You can try to argue that the measurement is biased, you can argue that this is not what is happening in the field, but this is the index and the figure that the market adjusts to.
For a long time we have been writing here about significant declines in the housing market compared to the CBS data which showed minor declines. But, the CBS is the CBS, it has the most complete, most comprehensive information, it has the ability to neutralize exceptions, it has a view Including the whole country and specific regions, but there are problems and distortions in the data.
The problems with the housing price index
The CBS index is admittedly limited by definition, but it is the starting point for the behavior of apartment prices in Israel. A central problem with the index is the delay in presenting the data. The apartment price index published on February 15 (alongside the consumer price index for the month of January) expresses the apartment prices in November- December of last year, meaning an “average” of December 1. This index expresses the reporting date, but people report by law with a delay of months (up to 4 months is allowed). That is, we now get an index that is based on data from a good few months ago. Beyond that , just to illustrate another problem, imagine that in a certain period, the public reports on the transactions after 3-4 months and in the following period it reports quickly. A situation arises that we, as consumers of the CBS data, will receive indicators that are not arranged according to chronological dates.
These problems are fixed later. The CBS accepts the truth data and standardizes the past data. There are significant changes, but as a whole when you look at the impact over time it is offset. In other words, there may even be a deviation of 0.2% in a certain month, but in the following month or months there will be a deviation in the opposite direction.
Another problem with the data is that it does not express the funding. Contractors let you purchase an apartment with 5% equity and the rest over several years. There is a large financial gain here, which actually expresses a large discount. The CBS does not check it, they don’t have the tools to check it.
And there are two other measurement problems. The first and well-known comes from the fact that an apartment is not a uniform product. It’s not oranges, it’s not cucumbers, it’s not bamba. An apartment sold today is different from an apartment sold 10 years ago. The whole environment has completely changed, lobby, elevator. Even inside the apartment, you get much more from contractors than before. Even in second-hand apartments, it is impossible to compare because it is a mixture of apartments built over decades. Is a square meter in an apartment from 1960 equal to a square meter in an apartment built in 2023?
Another distortion from the same family – the renovation costs. You bought an apartment for NIS 2 million, invested NIS 400,000 in renovations and sold it after 7 years for NIS 3 million. As far as the CBS is concerned, the price went up by 50% (3 million compared to a purchase for NIS 2 million). The truth is that if you take the cost of the renovation, the price went up by 25%. A huge gap that is not reflected in the index and creates a distortion.
All the problems up to now, although they affect the apartment price index, it is likely that they do not cause it to show a different trend over time. When the apartment price index increased in 2022 by nearly 20%, then it is clear that apartment prices have increased. The power can be debated. The glitches shown here soften the increase, it’s maybe 12%, but it doesn’t completely distort the picture.
But when the indicators are around zero, these problems occupy a larger relative share. When the index rises 0.7% in one month, after a decrease of 0.4%, and several months of decreases of up to 1%, then for the public the data has a tremendous meaning – They estimate that there is a trend change although this could be due to the mix of apartments and measurement problems presented above.
The intentions of the CBS are good – but the result is problematic
In other words, the good intentions of the Central Bank may in this case actually create a huge malfunction in the market, which by definition is a market driven by psychology more than economics. Thousands of people who sit on the fence and wait for continued declines in apartment prices may say – “That’s it, the trend has changed” and rush to buy apartments.
There is no claim to the CBS here, the data is limited and it would be to the bureau’s credit that they emphasize and say this in every publication, but with such important and influential data one should behave differently. Especially since some of the measurement problems by definition produce price increases. That is, there is the deviation that results from the timing and as mentioned above Face time is corrected, but there are the other upward deviations that remain constant.
The biggest problem with data
I’ll start with an example. dYera Ramat Gan 2 rooms, 55 square meters was worth NIS 1.4 million three years ago. A year ago it was worth about NIS 1.9 million. Last month it was sold for NIS 2.15 million. The price of this apartment went up 13% last year while the market had price drops. The price of this apartment jumped over 50% in three years, at a time when, according to the Central Bank’s apartment price index, the increases were 20-25%.
The price of this apartment has increased due to urban renewal. Developers arrived at the building, made the tenants sign the improvement plan, at the end of which the 2-room apartment will become 3 rooms with a balcony and a balcony, the building will have an elevator. A new building. years, but on you, the value seeps in quite quickly and as time passes (and signatures, approvals, etc. are received) it converges to the future value of the apartment.
The cases of building evictions and urban renewal surround the center and create a large distortion in the apartment price index – the price increase in this apartment is reflected in the CBS data, but it is not due to an increase related to the housing market, to negotiations between sellers and buyers, it is due to the fact that it is simply a sale of a property Other! Selling an apartment plus an option for improvement or future improvement that are worth a lot of money.
If you disable the option for improvement, the gift that these apartment owners receive, you get that in 2021-2022 the increase in apartment prices is significantly modest. It is accepted that throughout the period that urban renewal intensified, this component of the housing price index rose and created an upward distortion. This perhaps explains some of the discrepancies between our data from the field and the CBS data – decreases in the field in the last year of 5%-10% while in the CBS it is a few percent.
In fact, the CBS should (not sure it can) produce two indices – The apartment price index for apartment owners which includes the improvement from urban renewal, and the apartment price index for apartment buyers which does not include this improvement since it does not concern him. These are unusual increases because the product is already completely different. If you will – an absurdity has arisen here that urban renewal, which is meant to make it easier for apartment buyers (construction to the height of thousands of apartments in the central areas), actually harms them by raising the price of apartments.
The larger the transaction component in urban renewal, the greater the impact on the entire index. During the war – in October, November, December, there were relatively few transactions, the potential apartment buyers sat on the fence. Investors were looking for an opportunity. An investor bought the apartment in Ramat Gan mentioned above, because its price has decreased compared to previous months. The seller knows he can wait and get all the improvement, but he needs the money. And although the price dropped, it actually increased the apartment price index, because it doesn’t really express the price of a sales transaction for an old 2-room apartment, but a new 3-room apartment.
So the index is not a fake, it is real, but very limited and creates a big problem – it can create a wave of buyers who were disappointed that the prices went down. This measure creates a consciousness, probably mistaken in a certain way, and it can be a self-fulfilling prophecy.
Everyone understands that the apartment market is in a complex situation, that construction starts are on the decline and this will affect the apartment stock and reduce supply in the future. Everyone understands that demand is constant and expected to continue. In such a situation, there was great fear of elevators later. It seems no one expected it to come so soon and for the right reasons.
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