"I read that the real estate market will collapse like a house of cards, is it true?"
An acquaintance asked me if the distribution of free apartments by contractors is a sign of an impending real estate market collapse. We examine why this is not the case and what hidden factors, including crime, are affecting prices.
- One of my acquaintances asked me this week how it is that a real estate company like Anshei HaIr is giving away an apartment for free. He read on one of the Facebook forums that contractors are about to go bankrupt and that the real estate market will collapse like a house of cards. He saw the distribution of free apartments as a sign that the contractors need oxygen. "I read that soon apartments will cost a million shekels," he said.
It is true, many contractors need an oxygen tank during this period, but that still does not mean that the real estate market is about to collapse. True, there are small contractors who are collapsing. They are leveraged, cannot meet interest payments, and some collect money from the gray market and do not withstand the pressure. "Look at what is happening in the mortgage market. The volume of mortgage arrears is rising to over 4 billion shekels. Does this mean that the mortgage market will collapse?" I answered him. "Still, in percentages, the number of people who are behind on their mortgage is close to 0.6%. There are people who cannot handle the mortgage and sell. The same is true for contractors."
"But you didn't answer, how can it be that Anshei HaIr is giving away an apartment for free?" he asked again. I explained to him that the company Anshei HaIr is not giving away apartments for free on the street and that it is a smart marketing act. There was a period when it could not sell apartments, so it decided to give away one apartment for free. "But an apartment in Tel Aviv costs 6-7 million shekels," he replied after reading only the headlines in the economic sections.
I explained that the apartment is a small 2-room apartment, worth about two million shekels. "So the contractor lost 2 million shekels?" he asked. "The apartment cost the contractor 1.6 million shekels. That is the amount he lost. But he saved 2 million shekels on a campaign he wanted to invest in and sold 13 apartments, some of them luxury apartments. Some of the money was received already now, in cash. The contractor brought eight-figure sums into the bank and saved the cost of interest, part of several hundred thousand shekels that he pays to the bank every month. So what do you say, did the contractor lose?" I asked.
"But wait a minute, it says that the company Prashkovsky is selling apartments in a tender, I heard them say that it reflects a 15% discount," he pressed. "You are right," I answered him. "But the discount is not on the company's price list, but on the surrounding prices. The price list is lower. I checked, and the minimum price in the project is about 8% lower than their price list."
"Well, and 8% is not a discount?" he asked. "Of course it's a discount," I answered. "But that's the minimum price. On average, the contractor is supposed to sell an apartment at a 6% discount, with a minor financing benefit. In any case, most contractors give a 4% discount. On the money he receives, he saves 3% in financing costs."
"So who wins?" he asked, just before I received the index showing that Anshei HaIr is the strongest company in Tel Aviv in the field of urban renewal. "Whoever buys and whoever sells," I answered. "You know what?" he concluded. "Maybe this is the time to take advantage of the pressure and buy a small apartment in Tel Aviv."
- Housing prices have fallen by single-digit percentages in the last year. Contractors are selling apartments at discounts and sellers of second-hand apartments are stressed and lowering higher percentages in the sale. Public companies are "skipping" over the slowdown in their reports. They refer to the issue of financing benefits in a separate line, so sales prices remain relatively stable — a decrease of 5%-7% on average. However, financing benefits reflect an additional decrease, so there are those who talk about a 10% drop in prices, especially in Tel Aviv.
It should be remembered that new apartments account for only 45% of all apartments sold, and of these, only a quarter have financing benefits. This means that a little more than a tenth of the apartments are sold with such discounts. In Tel Aviv, the impact is greater. When apartment prices in Tel Aviv fall, the chance that the housing price index will fall is higher.
The reason that apartment prices have remained relatively high is the costs of financing and commodities as well as construction costs. The interest rate is high, goods arriving from abroad have become more expensive, and Chinese workers cost 3 times more than Palestinian workers. One of the developers told me this week that he pays 1,600 shekels for a Chinese worker, while a Palestinian worker earned him sums of 500-600 shekels per day.
"If once an apartment cost me 100 shekels and I would sell for 130, today it costs 120 shekels. When a client wants a discount, I cannot lower the price much, so I give financing benefits. The prices in my project have not fallen by more than 4%, and the quality of construction has improved since the Chinese are here," he explains. "I really don't envy the contractors in Tel Aviv. They are in trouble. Selling apartments at higher discounts, 6%-7%. This market is in distress, so I didn't enter there." I asked if it is time to buy an apartment in Tel Aviv. "Although I don't sell there - but the answer is unequivocally yes," he answered.
- Land costs in Israel are very expensive. If you bought an apartment, it is likely that the expenses for land and construction account for at least 85% of the payment. But there is one more figure you did not take into account: how much the protection money is worth in your mortgage.
Brokers are attacked, elderly women are threatened, and millions are laundered: this is what is happening these days to some contractors, mainly small ones, in the periphery. The phenomenon of extortion and protection money does not stop. Once it amounted to detached houses in the area of Bedouin settlements in the Negev, and today it is returning in a big way - also to contractors. Yes, if until today you thought that the only factors that determine apartment prices in Israel are the Governor, the Minister of Finance, and the foreign labor market - you should update your mortgage calculator. A new, quiet, and formidable component has joined the equation: the "extortion under threat" clause.
This phenomenon is now also seeping into the second-hand apartment market. This week an indictment was filed against a crime family, who approach apartment owners, including an 82-year-old woman, and explain to them clearly: "You cannot sell apartments here, only I buy." The broker who sells apartments has long been out of the equation after these families smashed his car. They buy these apartments at a cheap price and along the way meet with contractors, threaten, and demand a share in the deals so that the construction site does not burn down.
If the current situation continues, and organized crime continues to penetrate the real estate market, prices will rise. Contractors do not include protection money in their reports, but the one who pays the price in the end is the apartment buyer. The police must deal with this phenomenon. The story from Ramle is only part of the phenomenon of criminal organizations. This time, the prosecution and the YAMAR (Central Unit) did a very good job. They requested to confiscate the apartments and the millions collected from protection money. This phenomenon must also disappear from the contractors' playground. And the sooner the better.
