Israel's Rising Construction Costs Clash With Falling Apartment Prices
Translated & summarized from Bizportal by baba
Construction costs in Israel have risen significantly, with the input index increasing by nearly 8% in under two years, while apartment prices have fallen by about 1.2% year-over-year. A large inventory of 85,680 unsold apartments limits developers' ability to pass on rising costs, such as labor and materials, to buyers. Many contractors are absorbing these increases or offering incentives like indexation waivers to secure sales. This trend could lead to delays in new construction projects, impacting future housing supply.
The story in 6 lines · by baba
- Construction costs in Israel have risen by nearly 8% in under two years, while apartment prices have fallen.
- A record inventory of 85,680 unsold apartments limits contractors' ability to raise prices.
- Labor costs have increased significantly, contributing to higher overall construction expenses.
- Buyers with contracts linked to the construction input index may face price increases of tens of thousands of shekels.
- Developers are offering incentives like indexation waivers to attract buyers amidst a weak market.
- Rising costs and falling prices could lead to delays in new construction projects, affecting future supply.
Despite a general decline in apartment prices across Israel, the cost of building new homes continues to climb. The construction input index, which tracks expenses for labor, materials, and equipment, has risen by 3.5% over the past 12 months and 2.7% since the start of the year. This marks a cumulative increase of nearly 8% in less than two years, following a 5.1% rise in 2025. For contractors, this translates to tens of thousands of shekels in additional costs per apartment. Buyers who have signed contracts with payments linked to the index are seeing their apartment prices increase even as market prices weaken.
The significant inventory of unsold new apartments, currently at 85,680 units representing approximately 26.7 months of sales, limits contractors' pricing power. Consequently, some developers are absorbing these increased costs within their profit margins rather than passing them entirely to buyers. In August alone, the construction input index rose by 0.4%, with labor costs being a major driver, up 5.3% in a year after a 9.1% jump in 2025. The composition of the construction workforce has shifted since the war began, with fewer Palestinian workers and more foreign and Israeli laborers, yet a general shortage persists, driving up wages and extending construction timelines.
While building material prices have seen a more moderate increase, specific items like rebar and quarry materials have become significantly more expensive. For a direct construction cost of 900,000 shekels per apartment, a 3.5% input index increase adds about 31,500 shekels. For a 100-unit project, this amounts to over 3.15 million shekels. On a 2.5 million shekel apartment, this increase is roughly 1.3% of the sale price.
Buyers with contracts signed since July 2022, where up to 40% of the apartment price can be linked to the construction input index, face direct price hikes. A 3.5% increase on a 1 million shekel indexed component of a 2.5 million shekel apartment adds 35,000 shekels, potentially reaching 49,000 shekels for a 3.5 million shekel apartment. Longer indexation periods can lead to even higher increases, with cumulative rises of nearly 8% potentially adding 79,000 to 111,000 shekels to the price of a 3.5 million shekel apartment.
The large inventory is forcing developers to offer incentives like indexation exemptions, favorable payment terms, and upgrades to attract buyers. Waiving indexation on 1 million shekels for a year, assuming a 3.5% index rise, saves a buyer about 35,000 shekels, which, combined with a 40,000 shekel discount, totals 75,000 shekels in value. This situation may also impact future housing supply, as developers might postpone new projects due to declining sales prices and rising costs, potentially reducing the number of new apartments available in the coming years.
