The Building index is climbing, and this is why you should know about it
Updated: Jun 24, 2021
Mazal Tov! It’s time to move into your new apartment. You may realize that you have many unexpected expenses, don’t let the building index be one of them.
If you have bought a new apartment, or if you are planning to do so, you must understand what the building index is.
What is the building index?
When you buy an apartment that is not built yet, you normally only pay some of the money at contract. The rest is paid incrementally based on the payment schedule that is agreed with the builder (Luach Tashlumim)
It's clear why you do not want to pay all the money before receiving the apartment, but there is one downside: The building index.
Any amount of money that you owe the builder is linked to the building index.
The building index reflects the price of the different materials that the builder uses to build. Glass, Metal, elevators, and pipes are just some examples of what is included in the building index.
For example, Say you bought a 4 room apartment for 1,750,000 NIS (current prices…). You paid 20% on contract and have another 80% to pay, which is 1,400,000 NIS. This year the index has gone up already 2.8%. When you pay the extra 1,400,000, you will need to add 2.8% of them, which is 39,200 NIS.
Why are payments linked to the building index?
The logic is, that if you haven't paid the builder, he can’t buy the materials yet, and since their price may increase, he might lose money. He solves this problem by linking your payments to the building index. (This is the justification for linking the payment, it doesn't matter if in reality, the builder lost money or not)
How much does the building index go up?
This is a question that no one can answer. It's like asking how much will the stock market go up. If anyone would know they would be too busy making money to speak to you about it.
What we can do is look at the history of the building index.
in 2010 the index went up by 3.8%. similar changes happened in the next two years until in 2013 the index went up 1.5%, followed by 0.8% in the next year. a 1-2% increase took place from 2015 until 2020, and these were the numbers that we have been used to. this year is not over yet, and the index has already gone up by 2.8%. (see full table at the end of this article).
What has changed?
You may ask why the index has gone up this year so much more than in previous years. The reason is Covid-19. Many of the materials are imported, their production has slowed down and transportation has become more expensive. What hasn't slowed down is the building. The increasing demand and decreasing supply have created this price raise.
The prediction is that the index is going to keep going up, no one knows exactly how much.
Is it worth paying more of the money earlier?
This is the big question. First of all, the builder does not always allow you to change the payment schedule that has been agreed upon. It all depends on what the contract says.
If you do have the option to pay earlier, you need to compare it to your other options. If you are taking a mortgage you must remember that paying earlier means that you also need to start paying the interest on your mortgage. This is a question worth discussing with your mortgage broker to get a clear understanding of the pros and cons.
It is important to know that this extra cost is not covered by your mortgage. This is another reason to be aware of it and not be surprised at the last minute.
any payment you owe the builder is linked to the building index. Due to corona the index has gone up and is predicted to carry on going up. It is worth considering paying the builder earlier than you were planning to.