Housing Starts Fell in 2014, Threatening Further Price Rises

New building shrunk 7.9% last year, with the decline accelerating in final quarter.

Nir Keidar

Construction of new homes fell 7.9% last year to a preliminary 43,620 units, marking the latest in a series of bad news about the state of Israel’s real estate market, the Central Bureau of Statistics reported.

Moreover, the decline continued into the fourth quarter, when housing starts dropped a seasonally adjusted 9.8% from the third quarter and down 15% from a year earlier, the CBS said.

The decline comes in stunning contrast to promises by the government last year that it would boost construction by selling more state-owned land through the Israel Lands Authority and a collaborative effort with municipalities to speed building approvals.

It also comes at an awkward time for Prime Minister Benjamin Netanyahu, who has been faulted for allowing home prices to soar during his last two governments and faces voters next Tuesday in the general election.

After slumping in the middle of last year, due to the Gaza war and anticipation that the government would act to exempt many new-home buyers from the 18% value-added tax, home sales have soared again in recent months. The decline in housing starts means that supply will be constricted for some time to come, pressuring prices higher.

Building by private contractors dropped 8.6% to just over 34,000 units while the government’s role in the market rose for a second year in a row to 21.9% of all stats, the CBS said.

Figures in the real estate and construction industry on Tuesday blamed the government for the construction slowdown.

“The drop in housing starts is a badge of shame for the outgoing government,” said Eran Rolls, CEO of the Israel Building Center, a contractors’ trade association.

“It’s a symptom of the Zero-VAT plan [former] Finance Minister Yair Lapid promised in a press conference even though he had no actual plan. That created a half-year-long freeze. Buyers stopped buying new homes and builders stopped building.”

The Housing and Construction Ministry on Tuesday insisted that the CBS figures were not preliminary and that final figures would show the number of starts at about 47,000. That would put it close to the 2013 figures of 47,351 and higher than any of the other four years, which ranged from a low of 35,150 in 2009 to 46,923 in 2011.

“Because of Operation Protective Edge and delays in lower-cost housing programs — Zero-VAT and Target Price — between March and November, some developers and contractors waited to get building permits until they saw that market conditions were clearer,” said the ministry, which is led by Uri Ariel of Habayit Hayehudi.

It noted that the increases in starts were recorded in towns such as Harish and Rosh Ha’ayin where the government has conducted mass tenders. The Target Price plan, which went into effect this year, offers discounts on land for building, as long as developers pass their savings on to home buyers.

Rosh Ha’ayin, a town between Tel Aviv and Jerusalem, saw the start of construction on 2,240 homes, more than double the 2013 level, while Harish, between Tel Aviv and Haifa, recorded about 1,600 starts, up from just 19 in 2013.

But in Tel Aviv, starts dropped by 11%, to 2,100 units. The decline in Petah Tikva was a more moderate 3.7%, to 1,590. Rishon Letzion saw the biggest decline of any major city, a drop of 34.1% to just 827 units, the CBS said.

“In towns where projects had been approved before the Zero-VAT and Target Price programs were announced there was an increase ion construction starts,” said Roni Cohen of Eldar Real Estate Marketing. “But there was a sharp drop in cities including Rishon Letzion, Rehovot, Ashkelon, Petah Tikva and Tel Aviv that pushed prices higher throughout the market due to the shortage of supply.”

In addition, the number of homes under construction nationwide declined 4% from the end of March 2014, when building was at its highest level since 1997, to 93,100 at the end of December.