Buy now pay later deals blur housing price data

The Housing Price Index rose by 0.7% between October-November 2023 and November-December 2023, at the height of the war, after eight consecutive months of falls, the Central Bureau of Statistics reported last week. Prices of new homes rose by an average of 0.9%, after seven consecutive months of falls.

An analysis by “Globes” found that the public seizing on special offers by developers was the main contributor to the rise in prices, with new apartments making up 40% of the overall market – a proportion not seen in recent decades.

44% of sales in Tel Aviv

Over the past year, it has become clear that in some of Israel’s major cities, led by Jerusalem, more new apartments than second hand apartments are being purchased, and this is pushing up average prices, while the prices of second hand apartments have fallen slightly since the start of the war.

In the fourth quarter of 2023 (the war began just after the beginning of the quarter), 13,000 housing deals were completed. This is an especially small number with the number of second-hand housing deals down 30% from the third quarter of 2023. The number of new apartments sold in the fourth quarter of 2023 (not including government subsidized programs) fell 20% from the third quarter.

This is the continuation of a dramatic shift in the market. In the past, the new apartments made up 20%-25% of housing deals. Since the wave of price increases after the Covid pandemic, the proportion of new apartments in housing sales rose to 30%. In the second half of last year, and especially in the months of the war, it jumped to an unprecedented 38%. This shift was mainly seen in the past mainly in small towns like Rosh Ha’ayin, Sderot, Netivot and Kiryat Bialik, where there was huge construction of apartments on state land, including many subsidized apartments. However, last year, the phenomenon also spread to large cities, primarily Jerusalem, where 2,476 new apartments were sold, about 40 more than second-hand apartments; 53% of all 1,452 apartments sold in Ramat Gan last year were new apartments; 57% of the deals in Rishon LeZion were for new apartments. In Ashkelon, Ashdod, Nahariya and Beit Shemesh, more new apartments were sold than second-hand apartments in 2023, while other large cities also recorded exceptional rates of entrepreneur transactions, most notably Tel Aviv, where 44% of the apartments sold were new, and Petah Tikva (50%).

The nominal prices has not fallen

All this is happening in a market where all transactions in 2023 recorded decreases, but the sector that stood out more in the declines was second-hand apartments. Over the past year the Housing Price Index has fallen by 1.4% while the index of new apartment prices that are not included in the subsidy programs fell by 3.5%.

However, most of those decreases were in the first half of 2023. In five of the six months in the second half, an average monthly decrease of only about 0.2% was recorded, which was almost completely offset by the increase in the final month of 2023, when sales campaigns by developers, which were launched in the first half of 2023 and peaked at the end, as reflected in the percentage of new apartment purchases.

The main jump was due to the financial operations of the developers. When the first signs of recession appeared 18 months ago, mainly due to interest rate hikes and higher mortgages costs, developers switched to selling apartments using the “80/20” method – pay 20% of the apartment’s price on signing, and 80% on occupancy, unlinked to the index. Over time, this rose to 90/10 and even to 95/5. In some cases, also offered are improved specifications for the apartment, subsidized mortgages and more. The nominal price of the apartment, on the other hand, does not decrease.

The effect of these types of campaigns is equivalent to the effect of lowering interest rates, pushing in the direction of price increases, since a person is first required to pay a few hundreds of thousands of shekels to the developer and thus secure the apartment without entering into short-term obligations and mortgages. Later on, the buyer is able to choose whether to sell the apartment, while it is still on paper and realize profits, or offset losses, depending on whether apartment prices rise or fall. This is a level of flexibility that does not exist for second-hand apartments, and also allows developers to sneak in price increases through the back door.

Huge economic importance

This is a way in which the developers and banks can moderate price falls and attract buyers to projects at a low-point in the market at the expense of developers’ profits.

“Assuming we are talking about apartments on paper that will not be delivered for another three years, this is a discount of 10%-15% on the apartment price,” estimates Dr. Yair Duchin, Head of the MBA program in real estate financing at the Hebrew University, Jerusalem School of Business Administration.

“If today you can buy an apartment for a million shekels, pay NIS 50,000 now and the balance in 3 years, and be exempt from the interest on mortgages that reaches about 6%, this is a discount of enormous economic importance, but the Central Bureau of Statistics cannot distinguish it. This is exactly the difference between the terms ‘face value’ written in the contract and ‘present value’ of the future stream of payments, which is the real price.”

An index that is supposed to more faithfully reflect the direction of the market, was supposed to be an index for the prices of second-hand apartments, which obviously does not include campaigns and cover-up declines. The problem is that there is no such index, and all that can be derived from the two existing indices is that indeed, during the war, the second-hand market recorded larger declines than the market for new apartments. The increase it presented in December was also much more modest than that of the new apartments.

Published by Globes, Israel business news – en.globes.co.il – on February 20, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.