Contractors: Building Starts to Fall 12% in 2014

Uncertainty in sector, including long wait for Lapid’s zero-VAT break, has led to slowdown.

David Bachar

Residential-construction starts will likely drop 12% this year from 2013, putting another squeeze on housing prices, the Israel Builders Association warned on Wednesday, pointing the finger at Finance Minister Yair Lapid and his plan to exempt many home buyers from value-added tax.

The survey, which was based on government figures for housing starts so far this year combined with figures on building-permit applications, showed that construction on some 40,000 new homes would begin this year, 11% below the 45,000 the government had counted on to help cool rising home prices. The survey did not include the impact of Operation Protective Edge last month, which slowed construction activity in the south of the country.

The VAT exemption, which would apply to certain classes of buyers purchasing newly built homes, is the centerpiece of Lapid’s plan to steady the housing market. But since it was unveiled, the proposal has caused buyers to delay buying homes, in turn causing contractors to suspend building. The impact is now going to stretch into October after the Knesset failed to vote on the zero-VAT legislation before it broke for summer recess last week.

Meanwhile the target-price plan, which offers contractors government land at lower prices if they pass on the savings to home buyers, has yet to be put into effect.

“The uncertainty throughout the economy caused by the delays in the zero-VAT legislation and in implementing the ‘target price’ plan is likely to reduce building starts even more in the third quarter,” the association warned.

The association noted that building starts had declined over the past 18 months, a drop attributed to the growing uncertainty in the housing sector.

The number of starts fell 6% in the first quarter of the year from fourth-quarter 2013 and were down 16% from the first quarter of last year. Only 4,550 new homes were sold in the second quarter of 2014, a 20% drop from the first quarter and a 28% drop from second-quarter 2013. It was the lowest number of quarterly sales of new homes in the past 2 1/2 years.

The number of homes zoned in land tenders issued by the Israel Lands Authority fell 5% in the second quarter from the first quarter, reflecting an annual pace of only 21,000 construction starts, less than half the amount the government planned.

At the same time the homes are taking longer to finish, with the average number of months needed for construction rising this year by 9% to 27 months. The reason, said the Builders Association, is a lack of construction workers.

As the supply of new housing is falling, prices are continuing to rise. The association’s economists expect prices to rise by 8.6% this year, about the same rate at which they’ve risen since the government announced the zero-VAT program and target-price plan.