Why Are Israeli Homes So Expensive? It Starts With High Land and Building Costs

Industry sources say the solution is bringing in more foreign workers and introducing modern technology.

Real estate properties in Tel Aviv.
Ofer Vaknin

Construction is the biggest part of a home’s cost in Israel, representing about 35% of the selling price, says an analysis by the Association of Contractors and Builders in Israel.

Land and utility infrastructure — water, sewage, electricity and the like — account for 30% of the final price (more in prime areas). Taxes soak up another 22%.

How, then, to lower housing prices in Israel? Builders say the answer lies in importing more low-cost labor.

Construction costs include direct expenses such as materials — cement, steel, flooring, tubs and toilets and all the rest — and labor. They also include indirect costs, such as the builder’s operating expenses — executive and staff salaries, legal, marketing and financing expenses.

Taxes and the cost of land and tax make the news on a regular basis, particularly after Finance Minister Yair Lapid proposed his “zero-VAT” plan for first-time home buyers. Housing and Construction Minister Uri Ariel has a different plan to lower the cost of land to contractors. But the government has always regarded construction costs as beyond its control.

One “explanation” for Israel’s high housing prices has traditionally been Nesher’s monopoly over the cement market. But the builders’ association study found that while competition in this sector would lower costs, it wouldn’t really lower home prices. The association feels that one solution lies in increasing the quotas on foreign construction workers.

There’s no shortage of people to do “wet work,” such as painting and plumbing, windows and air-conditioners, which is done mainly by Israelis. But when it comes to “wet work” — plastering, tiling, pouring concrete — builders say they have to pay monthly salaries of 20,000 shekels ($5,800) to foreign workers, because they are in short supply.

Wet work is the core of the building, and these jobs have been given to foreign workers. Not because the contractors want to, but because Israelis don’t want to work in those trades, says Eliav Benshimon, the director general of the association.

The upshot is that the other factors involved in home prices are under control, but wages aren’t, he notes. Oil and steel prices depend on global supply and demand; oil can affect inputs; but the cost of labor is simply elastic.

Men from Moldova

“The government decided to allow 8,000 foreign workers to be in Israel at any given time, but there are only 5,000 right now,” says Benshimon. Importing foreign labor screeched to a halt when the government decided to limit the import of foreign workers to countries with which Israel has an agreement in place governing this business – which limits the point of origin to two places, Moldova and Bulgaria, he says. But neither has sufficient skilled manpower in these areas.

Contractors like Chinese workers, who are characterized by high production, professional attitudes, and skills. But as said, they’re in short supply and cost 20,000 shekels a month to employ.

The jump in labor costs has increased housing prices by 5% to 8%, says Benshimon, pointing out that the expensive “wet” workers are hired on long-term contracts.

And the shortage in skilled labor has had another cost: Building a home now takes 28 months on average, compared with 18 months in the 1990s, which bloats the company’s overhead — and financing costs.

The association estimates that building 42,000 new housing units, which is the Housing Ministry target, will require 20,000 foreign workers. To achieve the loftier goal of building 60,000 new units a year, in order to make up the shortfall that accrued (as demand outstripped supply over years), will take 34,000 foreign workers.

“I understand the government is trying to resolve the situation by signing a bilateral agreement with China,” says Benshimon, though there’s a snag — China does have an agreement like that in place, just one, with Singapore, perhaps indicating that it isn’t falling all over itself to sign more. In any case, Benshimon adds, there is an understanding in government circles that Chinese workers wouldn’t be taking Israeli jobs. They’d be taking jobs Israelis don’t want — hard physical labor — even for 20,000 shekels a month. Some will, but not enough to make up the shortage, he says.

Tel Avivans are fussier

It’s not just in Israel that foreign construction workers do the heavy lifting. In Israel, foreign workers account for 13% of the wet work, according to the association, compared to 14.4% in Germany, 17% in Italy, 22% in the United States and 26% in France.

That means skilled Chinese laborers are in a position to negotiate, and they can be picky about where they go. According to Yigal Govrin, chairman of the construction project management company WXG (Waxman-Govrin-Geva), some foreign workers will abandon a job midway if something better comes along.

That can add to the time it takes to complete a project.

It’s not only the “wet workers” that are in short supply. So are overseers, crane drivers and business engineers, Govrin says — and wages have gone up for everyone.

Govrin says it’s true that in addition to land being more expensive in desirable areas, so is construction – and the quality of the work is better. A relatively cheap home in the periphery won’t be built as well as a more expensive one in greater Tel Aviv. “It’s not politically correct to say so, but it’s true,” he insists.

The more expensive the area, the better the quality buyers demand, he explains. Tel Aviv and environs are wealthier than the periphery. While the cost of building the skeleton frame is the same everywhere, that’s not the same for what goes into that skeleton, the “finishing touches” if you will.

Those finishing touches, from the kitchen to the bathrooms to the building façade to the type of elevator, can run from say 150,000 shekels per apartment to half a million and counting.

It’s tempting to suspect that one could lower housing prices by simply lowering standards, but here the contractors are simply obeying the call of the market. A builder can’t lower costs in Tel Aviv by reducing quality because to begin with, the land costs so much that the quality of the finished product can’t be low. Buyers expect something for their money.

Just the labor — from cement pourers to window installers to painters, to administrators — costs 2,000 shekels per square meter of finished housing, estimates Prof. Yehiel Rosenfeld, head of the Construction Engineering and Management program at Haifa’s Technion Israel Institute of Technology. Now add the cost of materials to that, from cement to steel to a kitchen sink. That too can come to say 2,000 shekels per square meter. Add special equipment like cranes, and we get a total construction cost of 4,500 shekels per single square meter, Rosenfeld estimates.

And on top of that, Rosenfeld argues that the cost of the Israeli “everything will work out” nonchalance, the lack of professionalism of the Israeli construction industry that refuses to import advanced technologies that could reduce mistakes and ensuing repairs.

Anybody who’s bought a newly building apartment in Israel knows that getting the key and obtaining occupancy rights isn’t the end of the relationship with the contractor. It’s the beginning. It’s the start of a series of repairs of things built badly (or not at all), repainting walls, reinstalling broken tiles and fixing this, that and the other.

“Construction costs in Israel are actually reasonable relative to the world, even slightly lower, because abroad the materials are cheaper — a toilet in Israel costs more than a toilet in Europe, because we import it from Europe. ... But labor costs more in Europe than here,” says Rosenfeld. But the cost of Israeli inefficiency in construction is a whole other matter, and that’s what could be eliminated.

A job that takes 24 hours per square meter in Israel could be done in 15 with better workers, he growls. Sometimes a job needs doing twice.

The Israeli lack of professionalism bears a cost at several levels: the quality of work, the time it takes, the need for foreign workers to do the difficult bits — instead of which Israel could build an industry in which people would be proud to work, Rosenfeld sums up.

While all the West uses foreign workers, Rosenfeld suggests Israeli construction methods could be modernized. More components should be manufactured off-site, rather than being created at the construction site. That should improve the quality of the work, he says.

That’s how doors are handled these days – you buy them from a factory, with lock and key in place, and just assemble them at the site, but that isn’t how aluminum-frame windows are handled. Instead of basing the home design on a catalog of windows, the opposite is done: there’s no standardization. The aluminum window frames are made on the spot based on arbitrary window sizes, requiring a great deal of accuracy. One upshot is that window installers wind up using all sorts of fillers on the site, Rosenfeld says. That is not efficient, nor is the result quality work. “It’s like a car manufacturer deciding to use different-sized tires on each car,” he says. That wouldn’t be efficient either.