At Height of Israel's Housing Crisis, Builders Are Preparing for a Slowdown

After 2015 showed zero growth in residential construction, 2016 will be yet another one in which the government failed to increase output.

A construction site in Kiryat Gat, southern Israel.
Ilan Assayag

The housing price index published earlier this month showed a 1.3% rise in home prices in September, making it clear that the housing crisis is still with us and that, despite eight consecutive years of price hikes, it won’t be going away anytime soon.

But that wasn’t the only news that should be keeping the Finance Ministry’s special housing team awake at night. An in-depth examination conducted by TheMarker at the volume of residential housing construction raises an equally worrying finding: After 2015, in which there was a considerable slowdown in construction activity, a similar picture is expected for 2016.

These two lean years follow five years (2010-2014) in which there had been sharp year-on-year growth.

This means the pace of home building has slowed considerably, stymieing the government’s efforts to put a brake on home prices. Indeed, the trend is already evident this year, with a 10% drop in the number of apartments completed compared to the two previous years.

The tool used to measure the volume of output in residential construction was the data on gross domestic investment, published every quarter by the Central Bureau of Statistics. This reflects the value of all production in the residential construction industry. These statistics show that there was a 54% increase in the value of the industry’s output between 2010 to 2015 – from 50 billion shekels ($12.9 billion) to 76.7 billion shekels.

But this statistic is misleading, since it also includes the sharp increase in prices during these years. The figure does not provide an understanding regarding growth in output, since the rise in prices is not factored out. To do this, one must examine the output in 2010 prices, which shows a slightly more moderate increase in output between 2010 and 2015, even though it’s still quite a quite impressive rate of 35.5% (from 50 billion shekels to 67.7 billion shekels).

But focusing on the past two years produces a totally different picture. If in 2014 the output had grown 6.5% from the previous year, in 2015 output grew only 2.1%, almost exactly the rate of the country’s population increase (2%) – in other words, zero real growth.

According to lawyer Eliav Ben Shimon, director of the Israel Builders Association, “The total investment in the construction industry constitutes 9.6% of Israel’s gross domestic product, but the state is far from exploiting the possible growth potential. Overregulation in the field is one of the obstacles that decision makers must address. It takes an average of 28 months to build an apartment – an unreasonable figure.”

To complete the picture, nonresidential construction – of office buildings, commercial space and public buildings – has also been experiencing a slowdown in recent years, with activity down 3.4% between 2013-2015 (from 42.6 billion shekels to 41.2 billion shekels, using 2010 prices). According to the Builders Association, the pace of building starts for nonresidential construction during the first half of 2016 was down 23% from the same period last year.

Construction’s ‘glass ceiling’

Preliminary data from 2016 show that the slowdown is continuing. An estimate published by the Builders Association a few weeks ago put the number of building starts in 2016 at between 51,000 to 52,000 housing units, around the same as 2015 (when there were 51,000 building starts). The industry, therefore, failed to meet the government goal for this year of 60,000 building starts.

With regard to completions, the association predicts a drop compared to last year, with only 40,000 homes to be completed – compared to 43,700 in 2015. In 2014, 44,600 housing units were finished. In other words, this is the second year in a row in which fewer apartments were completed, even though the government considers increasing supply a top priority.

A "Tama 38" project in Jerusalem.
Emil Salman

Trying to figure out why the industry can’t increase its output and why, in fact, it seems to be producing less, involves a number of factors that create a sort of “glass ceiling,” which blocks the growth of residential construction.

Some 50% of such construction takes place on state land, making the quantity of land marketed by the state for residential construction a major factor in the number of building starts.

The Israel Land Authority and the Construction and Housing Ministry are responsible for issuing land tenders. And this year, for the second year in a row, there has been a drop in the quantity of land marketed by these two agencies.

Thus, while in 2014 enough land was marketed to build a record 50,500 homes, in 2015, land for only 44,200 housing units was marketed – a drop of 13%. And in the first 10 months of this year, enough land was marketed for only 29,200 units – only 53% of the government’s goal for the year, which was 55,000 homes.

Offering land for sale is great, but someone still has to buy it. This year, there was also a drop in the amount of land purchased from the state by developers (i.e., the number of successful transactions). In 2014, developers bought enough land to build 29,200 housing units, while in 2015 that figure was 30,600, an increase of 4.8%. But in the first 10 months of 2016, developers purchased land to build only 21,300 housing units. Here, too, that represents only 53% of the government’s goal, which was to sell enough land to build 40,000 homes.

The ILA doesn’t seem too concerned at having met only half the government’s marketing goals; its data show that the number of transactions closed by the end of the third quarter this year was higher than any comparable period in recent years, when the greatest mass of land was sold in the fourth quarter.

“The fourth quarter is the most intensive with regard to quantities marketed, and it’s expected to be [the same] this year as well. We will meet the government’s marketing goals,” said Adiel Shimron, director of the ILA.

But as noted, state lands are only half the story. What about private land, on which the other half of building starts traditionally take place?

According to the Builders Association, prices for privately owned land have risen sharply this past year, mainly because of the government’s affordable housing plan (Mehir Lemishtaken in Hebrew), which has made all projects on state land irrelevant for those who aren’t seeking their first home.

‘Banks unable to finance entire project’

According to Haim Feiglin, CEO of the Zemach Hammerman construction firm and vice president of the Builders Association, the residential construction industry has maxed out its capabilities, given the long list of obstacles that block developers from expanding their activity.

“The business model in the field is seriously ill,” Feiglin said. “Today, we are forced to tie up more and more capital in each apartment we build, and the equity of our companies is limited. The banks have also reached the limits of their credit. This creates a situation in which I cannot bring complete projects to market, but must work in stages. For example, the 750 apartments in the Achziv project in Nahariya [in which Zemach Hammerman is a partner with Electra Residential] can’t be built all at once; I have to split the construction into four stages. The banks aren’t able to finance the entire project.”

The second obstacle, according to Feiglin, is the lack of available land due to the affordable housing initiative, which many developers aren’t interested in, as well as the insufficient quantity of land offered by the ILA.

“We have no horizon,” he said. “When I look at what’s coming next, I don’t have a single project. If they don’t market larger quantities of land, and don’t stop this insanity of marketing 100% of state lands to Mehir Lemishtaken, I don’t see how it will be possible to move forward and increase output. On the contrary, chances are that it will decrease. Our interest is in increasing our activity, but they are forcing us to reduce it.”

But there is one bright spot. One area that has experienced significant growth in recent years is urban renewal – particularly projects under the Tama 38 national building plan, which allows residents to engage a contractor to strengthen their building against earthquakes, financed by building rights for additional apartments which the contractor can then sell. The apartment owners don’t pay for the work, which generally includes upgrades like an elevator, renovated lobby or additional room for each apartment.

Almost 15% of all building starts in the second quarter were part of an urban renewal project, most of them Tama 38 projects. But here, too, there was a slowdown due to an “interpretations battle” that erupted after a deputy attorney general ruled in September 2015 that the way the additional building rights were being calculated in cases where buildings were demolished and rebuilt was completely wrong.

Two weeks ago, the National Planning and Building Council approved an amendment that regulates the issue, and it is expected that after the wasted year of 2016, next year will be a year of intensive Tama 38 activity.

According to the IBA’s Ben Shimon, “Urban renewal has enormous potential in terms of the number of housing units, and they can be built in half the time it takes to put up apartments in new neighborhoods. Expanding this field, together with increased investment in transportation infrastructure, must be the key lever for promoting outlying communities. But to do this, the government must take several steps – like giving tax credits to contractors in return for building urban renewal projects in areas that aren’t economically worthwhile. Moreover, the next umbrella agreements to be signed must assure financing for infrastructure and increased incentives in this field.”

Avigdor Yitzhaki, the head of the Finance Ministry’s housing department, believes the “primary problem is manpower,” and says his team is “working on this issue intensively. Another problem is the credit crunch, and we are in discussions with the Bank of Israel to increase the credit framework for the construction industry.

“Building starts are expected to be at the same level as last year, but there will be a drop in completions,” he added. “The main reason for this is a lack of workers. The fact that we’ve brought the planning process to a place where, every year, plans for 100,000 apartments and more are being approved means that in 2017, a large inventory of land with approved planning will come to market on which construction can begin.”

The Israel Land Authority declared that it “will meet the marketing goals set for 2016. We’re pleased to note that in the third quarter of 2016, we already had the highest volume of land marketed compared to comparable quarters in the past five years.”

The Construction and Housing Ministry added that both it and the Finance Ministry “are working throughout the year on marketing land, and plan to meet the goal of marketing land for 55,000 homes. Contrary to what is being claimed, to date we have met 60% of our marketing goals, and we expect marketing to pick up toward the end of the year. The final statistics will be published at the beginning of next year.”