BoI: Construction market decline cut Q4 GDP NIS 25b

Apr 1, 2024 9:39 pm | News

The decline in activity in the construction industry could lop NIS 25 billion from Israel’s annual GDP, and that from the damage in the fourth quarter of 2023 alone, according to a report released by the Bank of Israel yesterday. The report says that the direct and indirect damage to GDP from the decline in the industry, which is mainly caused by a continuing severe shortage of workers, could reach 1.35%.

“The 50% decline in activity in the sector, which, before the war, represented 6% of total GDP, subtracted 3% from GDP in the fourth quarter (0.75% of annual GDP),” the report states, and continues, “The sector consumes raw materials and construction products from many industries in Israel, such that its low level of activity is liable to harm activity in these industries. The indirect effect of the 50% decline in its product over a quarter will probably result in a further 2.4% decline in total quarterly product (0.6% of annual product).”

This means that the direct damage from the decline in activity in the industry in the fourth quarter is NIS 14 billion. This is double what the Ministry of Finance estimated at the beginning of the year.

As far as the indirect damage is concerned, the Bank of Israel says that it may not become apparent immediately. “The indirect effect will not necessarily be immediate; it could take time to emerge, as the low demand in the construction industry permeates through to other sectors. If the level of activity in the industry continues to be low, the housing market is liable to be harmed for a long period.”

Recovery in 2024

More encouraging is the fact that as the war has gone on, the degree to which the construction industry has shut down has lessened. “In the first weeks of the war, construction sites were shut down on the instructions of the Home Front Command and local authorities. Towards the end of 2023, 28% of residential construction sites were still closed. At the beginning of 2024, the recovery continued, and at the end of February only 17% of residential construction sites were closed.”

Not all construction sites are equal, and the report states that the ones that remain closed tend to be the smaller ones, which means that the percentage of sites that are closed does not translate directly into the percentage of housing units construction of which has been retarded. Moreover residential construction sites have reopened more quickly than non-residential sites. According to the Central Bureau of Statistics, at the end of December, 53% of non-residential construction sites were inactive, versus 36% of residential sites.

The report says that the employment of Palestinians on construction sites in Israel should be reconsidered.” It would appear that some of the problems of restrictions on the supply of workers because of government decisions will not be solved soon, and require reexamination of the long-term policy on employing Palestinian workers. The presence of foreign workers requires local resources to provide housing and healthcare solutions for these workers, and is also liable to cause social difficulties. This matter should be examined from the security and geopolitical points of view as well, as the solution chosen will have significant consequences for the Palestinian economy.”

Risk in the construction industry has risen

The report also touches on the complex economic situation of the industry – with and without the lack of workers, an economic situation that began even before the war and in many ways intensified following it. “Due to the decrease in the sale of new apartments and their prices, the shift of demand to peripheral areas, where apartment prices are lower than in demand areas, and a relatively high rate of deals in government support programs, there was significant damage to the income of development companies,” the report states. “The need to move forward with projects that are under construction forced them to finance activity by increasing debt.” Later, the report unequivocally states that “High financing expenses alongside decreased income of construction companies increased risk in the industry”.

The report even translates this into numbers. Thus, while bank credit to development companies for buy land did not increase (due to a slowdown in the marketing of state land and due to the fall in land prices), credit for projects under construction increased 35% from the start of 2023 to the end of the third quarter, from NIS 36 billion to NIS 49 billion. The percentage of outstanding and balloon loans (loans in which the first payment is postponed for a certain period) of all mortgages was 11% on average in 2023, compared with 6% in 2022. “In December 2023, an unusual figure of about 18.5% was even recorded,” the report states.

In January and February 2024, this figure stood at more than 14%. As “Globes” recently reported the amount of outstanding and balloon loans shows an increase in the contractor loans that contractors grant to new apartment buyers, and now it seems that they too have contributed to the recent increase in construction company debt.

“There has been no substantial change in the proportion of apartments purchased ‘on paper'”

The report positively notes the industry’s activity in the fourth quarter – contrary to expectations, based on the state of the industry. “The difficulty of continuing construction due to the impact of the war, which increased the risk in the industry, could have deterred buyers from purchasing an apartment in projects in which construction is far from completion. However, from the analysis of deal data in new apartments, it appears that there was no substantial change in the proportion of apartments purchased ‘on paper’, that is, two years or more before the delivery date according to the contract. The rate was 68.7% on average in the first three quarters of 2023 and 65.3% in the fourth quarter.”

The report says “The performance figures for the fourth quarter of 2023 indicate a very rapid recovery of the industry. The number of building starts, about 14,000 units, was only 12% lower than the average of the first three quarters of 2023, while construction completions, about -15,900 units, and the number of building permits issued, about 21,100 units, were 13% and 22.5% higher than the average of those quarters.

In fact, the scale of residential construction completion in 2023 was the highest in recent years, and stood at 59,700 units. “It seems that many resources were directed to the completion of the construction of the projects, as well as speeding up completion of procedures and granting of approvals,” the report says, further indicating that the duration of construction is expected to be extended due to the lack of workers since the start of the war.

Additional numbers on this matter: the proportion of new apartments that were purchased and are supposed to be delivered to buyers within six months increased slightly, 10.4% on average out of all deals in the fourth quarter, compared with 7.3% on average in the first three quarters of the year. In contrast, the rate of apartments for immediate delivery was very low – 1.2%, before and after the war.

The report also refers to apartment prices, which fell 0.6% in 2023. It says, “Apparently, the effective prices of the new apartments sold on the free market fell even more than what was measured by the central bank, due to various benefits that are not embodied in the list prices of the apartments, such as extras and changes at the tenant’s request, at the expense of the developer, deferment of payments, participation in the mortgage payments and even participation in purchase tax payments.”

The report notes that after the sharp fall in the number of deals in the housing sector after the outbreak of the war, there was later “a considerable recovery in the number of deals, which even rose in January 2024”.

On foreign residents purchases, the report says, despite talk of an expected strengthening of activity in Israel, following the war and rise of anti-Semitism worldwide, the report shows that the number of apartments purchased by residents abroad after the outbreak of the war actually fell compared with the number in the first three quarters of 2023. “The influence of foreign residents on the Israeli housing market is negligible. Their share in purchases between 2014 and 2023 was about 1.5% on average, and they also sold apartments, so the number of net purchases is even smaller.”

Will the development boom in the south come to a halt?

The report devotes a full section to the impossible situation with which the residents of the southern and northern borders are coping. Under the headline “Welfare Issues,” the section deals with the treatment of the residents of the south and the north, the number of evacuees, which reached 250,000 at its peak (organized evacuation by the state, and independent evacuation).

“With the outbreak of the war, an unprecedented situation was created, in which residents of settlements on the southern and northern borders were forced to evacuate their homes for an extended period and move residence to safer areas,” the report notes, expanding on the development of settlements in the Western Negev mainly, in the years before the war, and raises fears of its halting following the events.

“The momentum of demographic growth in the Western Negev, as well as the beginning of such growth on the Lebanese border, may be halted as a result of the security crisis following the Swords of Iron war. A policy that will support the process of demographic growth in these localities must first strengthen the security of the residents. Moreover, in terms of increasing housing supply, it is important to invest in cultivating and developing regional attraction factors, including quality infrastructure and services such as education, health, culture and transport, as well as in the creation of quality sources of employment. These may attract new residents with a high socio-economic profile and prevent their migration away.”

Published by Globes, Israel business news – – on April 1, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

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