Photo Credit: Flash90
Finance Minister Moshe Kahlon at a signing ceremony for new apartments in Haifa, March 19, 2018.

The Bank of Israel is concerned about the continuous decline in residential construction in the last four quarters, Israel Hayom reported. A discussion held Monday by members of the Monetary Committee of the Bank of Israel noted that, as a result, there is some acceleration in the rate of rent increases in Israel.

Back in August 2017, after the High Court of Justice had revoked his tax on buying a third apartment, Finance Minister Moshe Kahlon expressed deep disappointment and vowed: “We will continue to fight against the investors.”

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Turns out the minister has been outright victorious in his struggle against investors, as noted by the Monetary Committee members, who pointed out that while new apartment prices had dropped 2.7%, investment in residential construction is declining, alongside the demand. So, cheaper homes nobody wants to buy.

The rent increases are consistent with the exit of investors from the market and the implementation of the Mechir LaMishtaken (Buyer’s Price) program.

In April this year, the board of directors of the construction industry attacked Finance Minister Kahlon and vehemently rejected his policy regarding the construction industry, especially Mechir LaMishtaken.

Mechir LaMishtaken is a method of sale of land designated for the housing construction, according to which interested developers compete for tenders based on the final price the occupant would end up paying them. The winner of the tender is the developer who offers the lowest final price per apartment according to the conditions stipulated in the tender.

The program has been criticized for a number of issues.

In some of the projects that were offered to eligible buyers, the proposed mix of dwellings consisted of mostly large apartments, which was not suitable for small families and singles who are the typical buyers in the Tel Aviv area, and who did not go for the necessarily higher prices. Those prices may have been lower than the area average for large apartments, but the buyers wanted small apartments.

Also, it has been suggested that some Mechir LaMishtaken lottery winners do not intend to live in the apartment they won, they intend to rent them instead and live elsewhere, thus, in effect, becoming real estate investors whom Minister Kahlon vowed to fight.

In some of the Mechir LaMishtaken projects, many of the winners waived their right to purchase an apartment because it did not match their needs. This often had to do with the fact that the state’s desire for rock bottom prices the apartments were built to a lower standard than what is expected in 21st century Israel. At the same, the state’s desire to speed up the projects’ completion prevented buyers from getting the developers to add personalized adjustments to the specifications, which they would have under normal circumstances.

“If the government continues its policy, it will cause the largest housing crisis we have ever seen,” Ronny Brick, President of the Israel Builders Association, warned in April. “The government controls the land through the Housing Cabinet, causes reduced demand and encourages apartment buyers to continue sitting on the fence.”

Brick added that “the contractors on the ground are facing great uncertainty. We share the view that urban renewal projects are the way to increase the housing supply, but progress has been slow. Today there are 7,600 apartments whose construction began as part of the urban renewal, but this is nothing compared to the potential.”

Assessor Erez Cohen, the former chairman of the Real Estate Appraisers’ Bureau, told Israel Hayom that Kahlon has turned the real estate industry upside down, placing niche projects such as Mechir LaMishtaken at the center of the construction activity in the country, while the heart of the market demand has been receding. Although he is optimistic about the future of housing construction in Israel, Cohen points to the fact that only 500 apartments were purchased by investors in April 2018 – fewer than 10% of the overall market – demonstrates the artificial distortions imposed on the housing market.

He also noted that only 30% of the apartment sales in April—1,800 units—were at market value, while the rest were sold through Mechir LaMishtaken and similar projects, which does not bode well for Israel’s construction industry.

Historically, when recession or other ailments attacked Israel’s real estate industries, prices did not go down significantly, and investment money found its way elsewhere, to more attractive projects in Europe and North America.

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