Today's Rising Interest Rates Will Be Paid For With a Shortage of Apartments, in the Short and Long Term

The price of today's rising interest rates will be paid for with a shortage of apartments, in the short and long term
The decline in construction starts is one of the results of the jump in interest rates. Contractors prefer to build less at a time when demand for apartments is falling alongside rising financing costs

The number of apartments whose construction began in the first quarter of 2023 was 25% lower than in the corresponding quarter of 2022: almost 15 thousand apartments this year versus about 20 thousand last year.
This figure is worrying because it points to a slowdown that may eventually lead to a decline in supply and a rise in prices. Except that in the first quarter of 2022 there was a tide that had not been seen in the industry for at least 20 years.

Apartment prices that soared throughout 2021 and 2022 fueled the market at the time and took it to record levels. But a comparison of this year's first-quarter data with earlier periods shows that it is not unusual and corresponds to the demand for apartments. If the current pace holds, construction of about 60,000 apartments will begin in 2023, a number that meets natural growth and even leaves a surplus. According to the National Economic Council, the pace of natural growth in Israel requires the construction of 55,000 apartments per year.

In 2022 construction began on 67,000 apartments and in 2021 on 64,000 apartments, but as mentioned, these were particularly turbulent years. In contrast, in each of 2019 and 2020 construction began on 56,000 apartments.

However, the government cannot be arrogant right now, because we are only at the beginning of a period in which the element of uncertainty is high. The CBS data show the state of the industry in the first quarter of this year (January to March), at the start of which the Bank of Israel interest rate was 3.75%, while now it is 4.75%. It is not yet known how the continued rise in interest rates affected the pace of construction starts, but a reasonable hypothesis is that the number of apartments that began construction was lower in the second quarter of the year.

In addition, there is an unknown number of potential apartment buyers who are waiting to see which way the market goes. None of them wants to learn that they bought an apartment they could have gotten at a cheaper price, so they wait. This pent-up demand may surface just at a time when developers are in no hurry to build, and this may push prices up again.

The obvious question is how to maintain this pace of construction starts despite the rise in interest rates. The government can help especially by reducing bureaucracy and, more specifically, it must act to shorten the procedures for granting building permits in the municipalities. There are cities where the time to issue a building permit is more than two years. This is an untenable situation at any time, and especially in a period when loan interest is about 6%, so any delay costs developers a lot of money.

But elections for the municipal authorities are approaching, and the situation will get worse. First, because mayors prefer their voters to reach the polls calm, satisfied and without having gone through construction sites covered in smoke and loaded with trucks and tractors. And second, because during and after the elections, the local planning and building committees do not meet.