Construction activity in Israel is experiencing a significant decline, primarily due to the country’s economic situation. In the first quarter of this year, the number of construction starts decreased by 25% compared to the same period last year, making it the sharpest decline in recent memory.
The real estate market crisis has had a profound impact on the construction industry. A 40% decrease in transactions has led to a significant rise in unsold apartments held by contractors. When apartments are not being bought, developers naturally reduce construction starts. Unsurprisingly, in the first quarter of 2023, only around 15,000 construction starts were recorded, a setback that may continue throughout the year.
Tel Aviv remains relatively bright spot in the market. The largest Israeli city had the highest number of new apartments built in absolute terms in the last twelve months – 4,514 new apartments initiated between April 2022 and March 2023. Many of these were part of urban renewal projects, where developers have contractual obligations that make it challenging to halt the project. However, despite these efforts, the purchase of new apartments in Tel Aviv has declined by over 50% compared to the previous year, indicating a sustained downward trend.
Developers would stop construction if they could, but contractual obligations to apartment owners and buyers prevent them from doing so. This has resulted in a discrepancy between construction starts, which decreased by 10% in Tel Aviv, and the purchase of new apartments, which declined by more than half. This has led to a significant increase in the supply of unsold apartments in the city. Though the exact number is not available at present, according to some estimates the stock of unsold apartments has increased by approximately 2,000 units in the past year.
Jerusalem ranks second in construction starts, with 4,005 housing units initiated between April 2022 and March of this year. While purchases of new apartments in Jerusalem also declined, the decrease was around 11%. Notably, recent months have seen larger purchase numbers in Jerusalem compared to Tel Aviv, making the situation in Tel Aviv unique.
Other cities with significant construction activity include Rishon Lezion, Bat Yam, and Be’er Sheva. Approximately 13.2% of all construction starts are part of government-subsidised programs.
The bad news is that it probably won’t end there. Increasing interest and financing costs, along with falling flat purchases, are anticipated to cause further reductions in construction starts later this year.
Nonetheless, hope is not lost; the situation can be reversed. Israel’s government can take measures to help the country’s construction sector recover from a recent slump. Government action to revitalise the industry and avert the current crisis is possible through demand-stimulating policies, infrastructure investments, financial support and incentives for developers. These measures would not only boost apartment purchases and construction activity but also contribute to economic growth, job creation, and the overall improvement of the housing market.
However, it is worrying to observe that the government’s current focus lies on other priorities, such as the pursuit of judicial reform, which may not align with the immediate needs of the majority of ordinary Israelis. While the issue of reforming the long-standing Supreme Court is important, it may not be a pressing concern for the average citizen. Conversely, ensuring the smooth functioning of a key sector of the Israeli economy holds paramount significance. It is crucial for the government to shift its attention towards addressing the ongoing crisis in the construction industry. A balanced approach that tackles the immediate economic challenges is necessary to foster a comprehensive and sustainable recovery, benefiting both the construction sector and the overall well-being of the nation.