The Bank of Israel Surprises!

Dr. Adi Brender, head of the Bank of Israel's Research Department: "Prices will only fall back by the same 10% of the total cost added over the last 3-4 years, the real estate industry is not at systemic risk." Shlomi Heisler, Director General of the Ministry of Finance: "The decline in construction starts worries us greatly."

"The Bank of Israel constantly monitors risks in the real estate market, and at the moment we do not see significant systemic risks. This does not mean that there is no company that may be in difficulty, but not on a scale that endangers the system as a whole. Of course, high financing costs can trap someone who invested at the wrong time, for example in a very expensive plot of land that they bought, and if prices stop rising, it can cause them to earn less or even lose, but there is nothing here that is developing to the level of systemic risk." Dr. Adi Brender, head of the Bank of Israel's Research Department, said this yesterday (Sunday) at the Magdalem site's conference held in Kfar Saba.

According to him, we look at the information we have through the public companies, where we analyze the phenomenon in depth. We are interested not only in financial risk but also in the question: "Will the companies be able to keep building?" One of the interesting findings is the question of land prices versus financing costs.

"In the reports of the public companies we examined, we see that approximately 7 percent of total costs are financing costs, versus 35 percent that are land costs," he explained. On the other hand, financing costs did not move until the end of 2022. If prices at land auctions return to normal after the very sharp rise of recent years, and prices only fall back by the same 10% of the total cost added in the last 3-4 years, while financing costs double, which is not surprising given the rise in interest rates, the companies' total cost will decline slightly. That is, it will still be possible to keep building at the same prices. Therefore, as long as the government allows the minimum prices in tenders to come down, and it should be noted that the Israel Land Authority is now taking more initiatives in this direction, the market will do its part and here too there is no threat to activity. And this goes beyond the fact that the financial risks are not unusual."

"The housing issue is of great interest to the government and the Finance Minister. I must say that we have been working on a major plan for several weeks and I hope we can present a plan to the public in about a month." Shlomi Heisler, Director General of the Ministry of Finance, said this yesterday at the Magdalem conference: "We are at a point where finding the balance is very difficult. In the end it is not bad for sales to pause so that prices come down, but on the other hand we are very concerned about the difficulty of starting construction. To this we must add the fact that we know there are several dozen homes that are not selling because the developers are highly leveraged and cannot lower prices."

"Alongside the reductions in purchase tax and the spreading of payments for land, we also changed the structure of the tenders, and here we made a very dramatic change in the minimum bid that can be submitted. There is no doubt that when state revenue declines we worry, but it is not something that surprises us. Currently we do not deviate much from the forecast range. The whole world is currently stalled, and here too we have to think about the issue of recession. We can put money into the market, the question is whether that is right. The worst thing that can happen to the public is for inflation to rise, so we have to be very careful," Heisler explained.
Regarding the advancement of the metro, he said that "our position is to advance the metro projects. These are growth engines, and if we have to fight for it, we will fight." "The metro is one of the most important projects for us and we will fight for it with all our strength. It is an important project and we will not abandon it. It is very hard to predict, and any statement I made would be irresponsible. What I do say is that we said prices would stop and fall, and that is what happened. The interest rate did the job it was supposed to do. At least in the near future we will not see significant fluctuations. We must make sure there is a construction start right now."