Government to address skyrocketing construction index prices (Madad)

Inflation. Shortages. More inflation. Rising interest rates. And now, finally, some good news … maybe?

A new bill has been proposed in the Knesset that will hopefully address the ever-growing cost of apartments. The proposal calls for a revision of the Construction Input Price formula (which is called madad in Hebrew), in a bid to offset the skyrocketing extra costs of new housing due to the linkage to building materials.

It’s no surprise that in the post-Covid-driven economy, the prices of commodities have spiraled upward, leading to a whopping 5.3% increase in the Construction Input Price Index in the past year.

Construction Costs Add Up

So, what is this index?

The Construction Input Price Index is based on all building-related expenses, from raw materials, energy, and transportation costs to wages of laborers and others in the construction business — as well as the cost of land. And that land component is what the big news is about.

But first, a brief explanation of how the index works in general: When any industry faces price rises, either due to wage increases or rising materials costs, those expenses are passed along to consumers in one way or another. Thus, the Construction Input Price Index affects the ultimate cost of apartments … even if the consumer has never heard of it.

The Construction Input Price Index is especially relevant to those buying an apartment “on paper.” When a buyer purchases on paper, he makes an initial payment at the time of signing, with an agreement as to when future payments will be made. The final payment is usually made upon completion of construction, when the apartment is ready for habitation. While the first payment doesn’t change, because it has already been made, the final remittance and the incremental payments can be significantly higher than was anticipated.

Wait, how does that work? If you signed a contract, shouldn’t it be for the amount agreed upon? Yes and no. Because the cost of new apartments pre-construction is linked to this index (the Construction Input Price Index, that is), if the cost of construction materials goes up or the cost of labor increases, the contractor can adjust the price of the apartment accordingly. Thus, the buyer must pay more for the finished apartment than was agreed on at the time of signing because the unpaid portion of the cost was automatically linked to the index.

If a buyer has to wait a few years from the time of signing the agreement until the time his apartment is finished (and he usually does), that means he could be exposed to a major increase in the index … and the final price of his apartment could be tens of thousands of shekels more than he anticipated. Yikes!

The Land Factor

Now here’s what all the excitement is about. When a buyer purchases an apartment on paper, the land that apartment is sitting on was already purchased by the contractor, usually years prior to the sale of apartments on that land. Yet, because land is also – part of the Construction Input Price Index, when a buyer must ultimately fork over more money because the index rose, he’s also paying more for that land – even though the contractor could’ve bought that land even a decade earlier.

Israel has no control over the cost of goods. We’re an import-based country. And prices have gone up around the world. Cement may be more expensive. Workers may charge more. But land that’s already purchased doesn’t go up in price (though it may rise in value). It was already paid for. So why are consumers still paying more for it as part of the index, being forced to eat the cost while the contractors just make profit on it (sometimes in the millions of shekels)?

That’s what Housing Minister Ze’ev Elkin was wondering, too. The new bill, set forth as an amendment to the Sales Act, aims to rewrite the Apartment Price Index formula. The area of the property (as stipulated in the contract) will be multiplied by a fixed sum of NIS 5,500 (the average cost of construction per meter). Land will not be part of the equation (that is, the price of land will be isolated from the Construction Input Price Index). And, as soon as the apartment is deemed fit for habitation, the contractor will no longer be allowed to continue linking it to the index. The last clause of the bill levies sanctions against contractors who are behind on their building schedules.

The proposal still has to pass in the Knesset.

Is This New?

You may be wondering why you’ve never heard much about the Construction Input Price Index. While the indices are nothing new, they’ve traditionally kept a rather low profile, so to speak, because they’ve rarely risen above a certain level. Even when they did go up, it was usually in times of downward economic trends and mostly went unnoticed.

What makes the last year’s index rate adjustment different (and so much more noticeable) is that it coincided with a general rates hike within the housing sector. The Housing Price Index rose by 11% in a single year. And consumers were dealt a painful one-two punch.

That’s when watchdogs began taking a hard look at the indices — and the formulas used to determine them. Protests challenging the Construction Price Input Index’s mathematical veracity followed. The old formula was exposed as containing certain “cracks,” like the land component.

The main question was whether it was even legitimate to apply the index across the full price of a home. In some parts of the country, as much as 50% of a home’s price reflects the land component. The cost to consumers can vary greatly depending on a home’s location, the prices, and the date of purchase.

The longer it takes until occupancy, the longer the index’s time is running — like the meter of a taxi. How can price index linkage be justifiable in such a case? Was this loophole allowing big business to sweep tens of thousands of shekels from the buyers’ hands straight into their back pockets? And what about when construction is completed several months before occupancy, yet the official “completion” hasn’t been confirmed? Or, what about when many apartments are already occupied at the time of your apartment’s purchase? How can it be fair to keep the linkage running?

Buyers Beware

The new legislation has been introduced to address these burning questions. And while the legislation is good news, and according to the Housing Ministry will save buyers tens of thousands of shekels, undoubtedly there will be those who seek to exploit it in some way — and continue taking advantage of unsuspecting buyers.

Contractors sometimes put forth special offers for buyers to put down only 20 percent at signing, with the remaining 80 percent to be paid upon completion. At first glance, this could sound like an amazing opportunity, when, in actuality, accepting such a deal can end up being a huge mistake, because the ultimate price can be tens of thousands of shekels more than anticipated.

Contractors are, not surprisingly, opposed to the new proposal. They claim it will actually lead to another wave of price increases. There are fears that contractors will try to compensate themselves for the expected loss of revenue by changing the contracts they use and including other “costs.” (The law does allow direct price hikes to be passed on to consumers.)

And, of course, there’s the question of when an apartment is officially determined to be “livable.” Once construction has reached completion, it’s no longer bound by the industry price indices. But who determines what factors represent “completion”?

By law, the housing minister is required to establish these guidelines. But as long as these regulations remain unconfirmed, the legislation cannot be completed. It is important to note that in some locales, building and planning committees may issue Certification of Occupancy forms, which are considered valid, even without official regulation.

In a growing number of projects, buyers are increasingly expressing frustration over faulty building and occupancy schedules, while the contractors blame it all on the pandemic and refuse to compensate their clients for the delays. This proposal will certainly not resolve all the issues. But it will cause contractors to carefully consider their deadlines and the excuses they make for their lateness.

Regardless of what ultimately happens with the new proposal, a smart buyer will have a sharp team looking out for his best interest. The Getter Group uses discretion and serious negotiation to make sure our buyers aren’t being forced to pay for anything they shouldn’t have to. The Getter Group also makes corrections to the contracts and includes a unique appendix and special clauses that prevent issues like these, even as the contractors push back.

Though this new regulation seeks to correct some of these issues, nothing’s been passed yet. And there are always new ways and creative loopholes to take advantage of unwitting buyers. It’s more important than ever to have The Getter Group behind you.

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Contact The Getter Group for assistance with your property purchase in Eretz Yisrael: baila@thegettergroup.com.

This article is not a substitute for professional or legal advice. Author doesn’t guarantee that the information contained herein is accurate and does not assume any liability for any loss or damage caused by errors or inaccuracies in this article.