NEW LAW: Limiting the Building Construction Index
Updated: Aug 22
When buying a property in Israel and determining your budget, there will be additional costs above the purchase price, such as the acquisition tax, legal and brokerage fees, and other sundry items. When buying an apartment in a project under construction, also known as buying “on paper,” an important additional cost to consider is the Building Construction Index.
The Bank of Israel has a consumer price index, or CPI, to track inflation. In addition, it has many sub-indices that reflect the inflation rate within various industries. One of them is the Building Construction Index (BCI), which covers all costs associated with the construction industry, including construction materials, such as steel and concrete, as well as the cost of labor.
Back in the early 1980s, when the Jerusalem neighborhood of Har Nof was being built, there was so much construction taking place – coupled with ridiculously high inflation that crippled Israel’s economy – that the price of labor, steel and other materials literally tripled. Consequently, many developers who sold apartments in projects under construction ran into financial trouble because they sold for prices based on construction costs calculated at the time of contract signing, prior to the costs spiraling out of control. To complete the building projects was a money-losing proposition and therefore many builders declared bankruptcy and walked away from the construction projects. These bankruptcies caused long delays, which hurt the apartment buyers and the entire industry.
In response to this challenging experience, the government created the Building Construction Index to protect all parties’ interests. When someone purchases an apartment in a project under construction, the unpaid portion of the price becomes linked to the BCI. Parenthetically, buyers who are risk averse can often accelerate their payment schedule and prepay the lion’s share of the purchase price, thus limiting their inflation risk.
For the greater part of the last decade, inflation in Israel has been low and the BCI had averaged below 2% per annum. However, ever since the beginning of 2021, global inflation has skyrocketed. Unfortunately, the BCI has risen approximately 6% over the past year, due to the shortage of various raw materials.
Historically, the entire purchase price of a new apartment has been linked to the index. However, the recent BCI spike led to the advancement of a bill that was passed into law on June 30, 2022, which limits the inflation index to only construction-related costs. These costs represent approximately 40% of the purchase price, and the other 60% of the price – covering the cost of land, taxes, and profits – is not subject to the BCI.
According to the new law, the buyer will be permitted to pay at least 20% of the purchase price on contract signing without any linkage. All future payments will be treated as follows: 50% will be linked to the BCI and 50% will not be linked. Thus, a maximum of 40% of the purchase price will be linked to the index. Please note that this new law is not retroactive; it will only apply to new contracts of sale.
As expected, there's talk that this law will be appealed. It should be interesting to see how this plays out over the next few months.
We believe that this is an even-handed law. It protects buyers by excluding the cost of the land from the BCI, as it was already purchased by the developer and is therefore not subject to inflation. It also protects developers, as buyers will cover the cost of inflation for all construction-related materials. Furthermore, we feel that it will help stabilize the industry during inflationary times, as buyers will be less apprehensive to buy on paper, knowing that their risk is limited.
Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at email@example.com.