Buying a house on paper? You can pay 10-15% more than you think

People who have bought new apartments under construction might find that their price unexpectedly increases by 10-15% over the next few years due to the increase in the cost of building materials.

The final price of virtually all new projects sold in Israel is linked to the government’s construction cost index, which tracks changes in the cost of building materials and labor. The financing which is spread over the years of construction of the apartment is linked to the monthly evolution of the index.

“So, for example, if you bought an apartment for 3 million shekels and deposited 30%, the initial 900,000 shekels would be at the price you agreed to,” said Nachi Paris, the senior real estate agent of Nachi Realty. in Jerusalem. “But all future payments are subject to the building index increase since you signed the contract. So the NIS 2.1m. that you owe now could reach 2.3 NIS or 2.4 million NIS. in three years.”

For most of the last decade, the construction cost index has increased by 1 to 2% per year. However, the index rose 3.4% in the first six months of 2021, and experts expect it to continue rising at a rate of 5% per year for several years to come.

Disruptions in supply chains and high costs due to COVID-19 are the main culprits. Global prices for wood, glass and steel have more than doubled since the start of the pandemic.

In Israel, a major cement importer this week told customers it would increase prices by 15% due to the rising cost of materials it imports from Turkey, according to reports in the Hebrew press.

It all adds up to soaring house prices across Israel. House prices have risen 7.2% in the past year, according to the Central Bureau of Statistics, and they show no signs of slowing down. Data on new home sales and mortgage loans taken show records are being broken every month.

The government has made lowering housing costs one of its main goals, and the finance ministry has said a comprehensive new plan to curb the market will be released in the coming days. However, Construction and Housing Minister Ze’ev Elkin said prices will continue to rise even more dramatically over the coming year.

Among those affected by the rise in the construction cost index are those who bought subsidized apartments under the government’s Mechir Lemishtaken program several years ago, Paris said. Their clocks started ticking when they won the government lottery so they could buy the units at a low price, and many found themselves locked into five-year commitments at prices rising faster than people could have. predict at the time, he said.

“The developers are all very happy because this is money they are making without buyers even realizing it,” Paris said. “A lot of big developers have big warehouses that already have the glass and other materials they need, so their costs aren’t going up. But they still have the right to add the index, so they can pocket around 10% more. “

Some entrepreneurs are willing to let buyers pay more in cash to minimize future price increases, but many are not, under the terms of the sale contract, said Ori Bibas, real estate agent for At Home in Jerusalem.

Paris said it advises clients to opt for apartments that are already built so they know how much they are committing to paying, instead of buying on paper. In theory, a buyer of a developing property could try to negotiate with the contractor to remove the link to the building index. But Paris said he had never heard of it.

Bibas said people looking to buy apartments should do so quickly due to the rapid rise in prices. He didn’t discourage people from buying on paper as heavily as Paris, but he suggested that if they did, they should pay as much as possible up front.

Asked about other current real estate trends in Jerusalem, Paris said there was a huge shortage of apartments available for rent.

“I would say there are about five ‘for sale’ signs for every ‘for rent’ sign out there,” he said. “There is nothing available in any neighborhood, and anything that is sold in the market for a fair price is collected very quickly. “

Regarding new apartment buildings, Paris said similar-sized apartments in similar locations could cost, on average, 7-9% more in a new building than in an older building.

“If you compare, say, a 100m. apartment in an old building on Shimoni street 100 m. apartment in the new Tama-38 projects being built on the corner of Herzog, it’s probably around 8% more expensive, assuming the old building also has an elevator, ”he said. “If there is no elevator, the difference will probably be around 17% to 18%. Obviously, these are only general guidelines without taking into account other variables.
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Louis Miller

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