Israel’s Residential Construction Input Price Index

Anyone purchasing property from a contractor knows the residential construction input price index is one of the most significant factors that affect the price of the apartment. This is due to the fact that the sale’s price for the new apartment is linked to the residential construction input price index.  Consequently, all of the outstanding payments due to the contractor are linked to an index that usually rises.  The result of this is  the buyer’s cost for the apartment becomes more expensive by thousands and sometimes tens of thousands of shekels.

The word “Input” means “use of resources” and so the construction input price index literally tries to reflect the construction cost to the contractors. The index takes into account components such as the salaries of employees in the current economy, the cost of raw materials used for construction and other factors related to construction costs. The Central Bureau of Statistics publishes the index every 15 months.

Purchase of residential property from a contractor usually occurs before construction is completed and the building is ready to be occupied.  This outlines the predicament of the contractors: the market is set up so that they sell a product at a certain price, without actually knowing what the de facto cost of construction will be over time.  Construction of apartment buildings take time, during which the cost of construction is likely to change due to a variety of factors.  The contractor can neither accurately estimate in advance the cost of construction of the apartment, nor for that matter, the cost of completing the building in which that apartment is located.

Take the following scenario, just for example: let’s say that the contractor estimated that building the apartment that you were interested in purchasing is likely to cost him 700,000 NIS.  In consideration, the contractor decided to sell you the apartment for 850,000 NIS.  After 4 years, cement and iron prices had risen considerably and instead the construction cost the contractor 850,000 NIS.  In a case such as this, the contractor would be left without profit after four years of work.

To prevent a similar scenario, the prices of apartments are linked to the residential construction input price index, which takes into account data on both the economy as well as the construction industry. In fact, linking the cost of the apartment to the residential construction input price index can work to benefit both parties.  Linkage of the price to the index protects the contractor on the one hand and prevents the contractor from losing money as explained above.  On the other hand, it also protects the buyers for whom the profitability of the project means that the contractor will be able to finish construction of the apartment that they purchased on time. It is worth remembering that the linkage to the residential construction input price index is designed to maintain the contractor’s profit and will not increase the profit.

How is the index rise calculated? The website of the Central Bureau of Statistics has a very convenient tool for calculating the residential construction input price index. It should be noted that linking to the index will always be in accordance with the base index as stipulated in the provisions of the contract that you sign with the contractor, and shall only apply up until the actual date of payment to the contractor. In some cases, the contract may also allow the buyer to make early payments in order to avoid the increase in cost due to the rise of the index. The question of whether to make early payments requires expert personal advice and financial planning, and it is not always possible either.  This will greatly depend on the specific contract signed with the contractor.

It is highly recommended before signing any contract with a contractor, and before entering into any real-estate transaction in general, to first consult with a lawyer who specializes in the field.