Jerusalem Bank Launches Novel Deposit Tied to Construction Costs
Jerusalem Bank has introduced a new one-year deposit account in Israel that allows customers to link their savings to the residential construction input index. This product aims to assist individuals purchasing new homes "on paper," who often face installment payments tied to this index. The index, published monthly by the Central Bureau of Statistics, tracks changes in the costs of raw materials, labor, and transportation in the construction sector.
When the index rises, future payments to contractors increase, potentially inflating the final price of a home by tens or hundreds of thousands of shekels. The new deposit seeks to mitigate this risk by ensuring the deposited funds grow at the same rate as the debt to the contractor, thereby preserving the real value of the money relative to the purchase agreement. However, this strategy is described as risk hedging, involving costs and uncertainty.
Unlike fixed-rate deposits or stable money market funds with predictable returns, the construction input index is volatile. While generally positive annually, it can experience monthly declines. The deposit offers full exposure to these fluctuations, meaning a depositor withdrawing funds after a negative index month could see their principal shrink. This exposes savers to the risk of index decreases or lower returns compared to safer investment vehicles.
A common alternative is a shekel money market fund, offering daily liquidity and investing in secure assets like government bonds and bank deposits, yielding returns close to the Bank of Israel's interest rate. The risk with money market funds in this context is the potential for the construction input index to surge more than the fund's yield, creating a cash flow gap for the homebuyer.
Historical data shows significant and unpredictable divergences between the index and money market funds. For instance, from early 2021 to late 2023, the construction index saw a substantial rise, yielding approximately 13.1% on a 500,000 shekel deposit, compared to about 5.5% for a money market fund. Conversely, from early 2023 to late 2025, with higher interest rates, money market funds outperformed, yielding around 13.5% versus the index's 10.4% increase on the same deposit.
Considering the period from early 2021 to July 2026, the index-linked deposit would have grown a 500,000 shekel deposit to approximately 625,000 shekels gross, while a money market fund would have reached about 591,000 shekels gross. Tax implications also differ: the deposit faces a 15% nominal tax on index increases, whereas money market funds are taxed at 25% only on real gains. The bank's offering requires acknowledging the difficulty in forecasting the construction input index, unlike money market fund returns, which can be inferred from the current central bank interest rate of around 3.25%.
