In Israel, the Building Index plays a pivotal role in determining the costs associated with apartment purchases in new construction projects. Similar to the Consumer Price Index (CPI), the Building Index is updated monthly to reflect the fluctuating costs of construction-related expenses, including materials, labor, shipping, and other relevant factors. Published on the 15th of each month, this index serves as a benchmark for new constructions and does not apply to second-hand or resale properties.
For prospective buyers of newly constructed homes, the Building Index is a critical factor. Upon signing a registration form, the Building Index rate at that time is locked, serving as a reference point for subsequent payments made at later stages of the purchasing process. Buyers then compare this original rate with the updated index rate at the time of each scheduled payment. Typically, these adjustments result in a price increase. There could be a decrease in the Index throughout the construction period, but overall, the Building Index has traditionally followed an upward trend. Even in cases where the index might decrease for a short period of time, the original base price is unaffected and will not decrease (to protect the development companies). Historically, the Building Index rose approximately 1–1.5% annually, presenting only a modest increase.
However, in recent years, particularly after the COVID-19 pandemic, there has been an unusual surge, with the index climbing as high as 5–6% annually, leading to significantly higher construction costs and, consequently, increased payments for buyers. While there has been stabilization recently, the ongoing war has introduced new challenges, including labor shortages and material import delays, further elevating the index. However, rates have only risen as high as 2.5% annually, not near the 5-6% after COVID. These factors highlight the importance of understanding the Building Index’s behavior when investing in new construction and planning your budget accordingly.
Legislative Protections for Buyers
In response to this sharp increase, the Knesset implemented legislation to mitigate buyers’ exposure to the Building Index. Prior to this legislation, buyers faced the risk of price increases including during the period between signing the registration form and the signing of the actual purchase agreement, even if this period was used for negotiating the agreement in good faith. Under the new law, however, the impact of the Building Index on the purchase price is restricted. Specifically, the first 20% of the purchase price is now entirely exempt from adjustments tied to the Building Index, effectively shielding this initial payment from market fluctuations. In addition, any subsequent payments, only half of each installment is subject to index adjustments. For example, if the payment structure is 20% at signing, followed by 30% at a later stage, and a final payment of 50%, only half of the 30% and 50% payments will be linked to the Building Index.
This new structure ensures that a maximum of 40% of the total purchase price is affected by changes in the Building Index, providing buyers with increased cost stability.
A Breakdown of Key Cost Components in Construction
In any construction project, costs are generally divided into three main categories: land acquisition, construction expenses, and developer profit. Of these, only construction costs—subject to significant fluctuation based on market conditions—are justifiably linked to the Building Index. Land acquisition costs and developer profit margins are not effected by it and are therefore excluded from index adjustments. This is how the 40% indexing cap was established.
By creating this limitation to the exposure, the legislation strikes a balance, preventing the rapid inflation in construction costs from placing an undue financial burden on buyers while still allowing developers protection against rising costs that could otherwise impact the feasibility of their projects.
For buyers, these new limitations on the Building Index offer a layer of financial security and predictability in an otherwise unpredictable market. By reducing the proportion of the purchase price affected by the index, the Knesset’s legislation aims to make new construction a more stable and accessible option for buyers, particularly in an economic landscape where construction costs can rapidly escalate. At this time, this cap on the index is very favorable for buyers as the current fluctuation in the Building Index is closer to the historical rates while at the same time it can be applied to only 40% of the purchase price.
As the market continues to evolve, understanding the Building Index and its impact on new construction costs will remain essential for buyers seeking to navigate the complexities of property acquisition in Israel.
If you’re contemplating a new property investment in Israel, understanding the Building Index and its potential impact on your final purchase price is essential. Review your payment schedule carefully, and consult a real estate attorney familiar with the nuances of the Building Index to ensure you’re fully aware of any cost adjustments.
Building index for the last 12 months: (as of October 2024
