Cheaper housing – what could be bad?
by Baruch Labinsky
Israel has a population of over 9 million people, with conflicting opinions on virtually all subjects that probably equal that number! However, the one thing that most Israelis agree on is that the price of housing is excessive and forcing many first-time buyers out of the housing market.
In an attempt to bring down prices, since 2015 successive governments have tried to introduce a variety of plans to achieve that aim – with limited success. With details of the latest plan ‘mechir matara’ (target price) introduced by Housing Minister, Zev Elkin, being made public now, I thought it would be helpful to discuss the various elements and advantages and disadvantages of the plan.
Structure of the initiative
Eligibility: For a comprehensive list of those eligible to apply see www.kolzchut.org.il. A partial list includes those who haven’t owned an apartment (fully or partially) in the past 3 years, married couples (or those getting married within 3 months), singles over 35, single parent families (any age), and people with disabilities.
Preference will also be given to residents of that specific city where the plan is offered – residents being defined as either someone who lived there during the past 3 years, or someone who lived there for 4 of the past 10 years.
Lottery: Very topical for the month of Adar, this plan – similar to its predecessor – is a lottery and will continue in that format throughout the duration of the plan. Those fitting the criteria and who want to participate, complete the application for the lottery, and wait and hear if they have won a place – literally and metaphorically.
Number of apartments: In mid-February the numbers were announced –at least 30,000 apartments will be offered within the program during 2022, 9,500 in March with the rollout continuing throughout the year. If the numbers are true, it is the largest amount in one year since the launch in 2015. Until now the highest number of apartments marketed in one year was 28,000 units. (However, this number for 2022 contains about 13,000 units from the previous plan ‘mechir muvchat’ and even 3,000 units from the original ‘mechir lemishtaken’ plan.)
Time factor: The lotteries in this new plan are being announced before the various locations have been awarded their building permits ‘heterei b’niyah’, which means there will be a potential three-to-five-year lag between winning the lottery and receiving the apartment.
Locations: The projects will be throughout the country, focusing mainly on the periphery, with a proportionally larger number of units being offered in Haredi and Arab areas.
Before we discuss the value of the plan, let’s look at some advantages and disadvantages.
- Winners of the lottery will essentially receive a discount of approximately 200,000 –300,000 nis off the market price. That is the equivalent of buying an apartment, and having the government give you an extra room as a gift.
- When buying on the free market you usually need to put down at least 25% of the price of the home. With mechir matara, as long as the apartment doesn’t cost more than NIS 1.8 million, you only need to a 10% down payment. That is a very significant advantage for those with limited savings.
- There are hidden costs including the ‘madad b’niya’ (indexed inflationary index). On the 15th of every month, the updated madad b’niya impacts the cost of your apartment being built. This index reflects the increased and (possible but incredibly rare) decreased costs of building materials. In recent years, the annual increase has been approximately 2% – although during 2021 it rose by about 6%. If the time to completion is longer than anticipated, it will increase the cost of future payments, especially if you have large payments closer to the finish date. At this time of writing, the details of the program are still waiting to be approved by the courts. However, one element they are hoping to introduce is a partial or complete disconnect from the madad b’niya.
- Due to the time lag between winning the apartment and its completion, there may be an extensive period of time when you need to pay both rent and your mortgage. To ensure the discount you are receiving on the price is still worthwhile you need to include additional rental costs into your calculation. For example, if an apartment takes three extra years to be completed and you are paying 5,000 nis a month, that’s an additional cost of 180,000 nis that you wouldn’t pay for a built apartment.
- Depending on the lottery you will not know the size of your apartment until you are notified that you have won and have chosen your specific apartment. That means you could be in a situation where you don’t actually want to take the apartment you are being offered. (Each winner can choose the size apartment they want – those on the top of the list have first choice, with the ones on the bottom having less choice.)
Do you apply and hold off buying or not?
Unfortunately, there is no clearcut answer to that question.
If you are a young couple just starting out, have more than 10% (13% to cover yourself) to put as a down payment when the time comes, and realistically won’t be ready to even consider buying a home for the next three to five years then you have little to lose by applying. After all, even if you apply and win a spot you can always refuse to move forward. If you do win and you want the apartment that is available, you can determine if you can afford it and put a plan in place. With lower down-payments comes higher mortgage payments in the future so do your calculations carefully.
If you are ready to buy a home now and have a potential 25% or more to put down to be eligible for a mortgage, you may well be better off buying something already built, where your money will start working for you immediately – either by you renting the property out or living in it yourself. Can you really afford to be in limbo for the time until you find out if you have actually won anything, and run the risk that inflation will significantly raise prices in those interim years until the apartment is ready?
Where are housing prices going?
One of the aims of this plan is to bring down housing prices, due to the decreased demand the government is hoping will be created by all those who are waiting to apply or hear if they have won the lottery. The jury is out as to what the long-term impact of the plan will be on housing prices. But whatever benefit is created from the plan, along with the reduced number of properties purchased by investors due to the increased purchase taxes as of November 2021, will probably only be felt in a year or two.
You need to assess your personal situation before deciding or committing to something as major as a home. If you aren’t sure of your ability to analyze your finances sufficiently to make the decision, consult a professional. These cheaper housing plans are a great thing – but not necessarily for everyone. Behatzlacha!