The contractors' secret: why no apartment in Israel will be sold at a "clearance sale"
In the car market, lots are cleared with 20% discounts, but in real estate, tens of thousands of apartments are unsold and the price barely moves. From the "zero report" to the fear of a "domino effect": the real reason contractors prefer to absorb huge interest rates rather than lower the price.
A new car that is not sold in time loses its value and is sold at a "clearance price". A new, finished, and empty apartment can stand for months and even years, but continue to be marketed at almost the same price. It is the exact same economic problem, inventory that is not sold and costs its owner money, but with two completely opposite treatment methods. In the car market, they lower the price to return the market to activity, and in the housing market, the situation is different.
There are several significant differences between selling a car and an apartment. In an apartment, the leverage is much higher. Contractors take millions and pay interest of hundreds of thousands of shekels. In the car industry, the leverage is lower. And, apparently, the question arises: if car importers hold clearance sales, why don't contractors? There are several answers to this matter. First and foremost, a clearance sale of apartments will lead to an entrepreneurial loss and the bank will not approve such transactions. True, banks are not supposed to approve transactions for contractors. But on the other hand, they require them to meet a minimum profit threshold. If the contractors lose, the banks will lose. And banks do not like to lose.
"Car importers in Israel have imported more electric cars in recent years than the market could absorb, and got stuck with crowded lots," says Adv. Ilan Leibovitz, a former MK and member of the Economic Committee and an expert in international real estate. "Their solution was fast and practical: they registered the cars in their name, turned them into 'first hand, zero kilometer' vehicles and sold them at discounts of 17% to 20%. At the same time, they reduced or stopped the next shipments so as not to increase the inventory even more."
The Israeli housing market is stuck with an inventory of about 84 thousand new unsold apartments, but this number is distorted because most of the apartments are not ready for sale.
"Instead of acknowledging that the inventory does not match the required prices, the industry continues to build, continues to hold the official price and tries to attract buyers through contractor loans, payment deferrals and 20/80 promotions. This prevents the price drop on paper, but the stagnation itself only deepens."
What is different in the housing market?
"In the car market, a simple truth prevails that all players accept: the value of an asset is determined by the price someone is willing to pay for it today, and not by the price at which it was purchased yesterday. The buyer is aware of the depreciation, the importer understands it and the trade-in department prices the car according to the current market situation. When the inventory stands and begins to generate storage, financing and depreciation costs, the importer does not argue with reality. He lowers the price, absorbs the loss, sells the inventory and clears space for the next model. In the housing market, they operate differently. Even when a finished apartment stands empty and does not find a buyer, the asking price is presented as if nothing has changed."
Contractors don't just insist. The banks won't let it happen.
"The reason is not just stubbornness. Contractors are bound by the 'zero report' and the conditions of the lending bank, which set a price threshold for the project and make it difficult to sell at an open discount. A sharp drop in price could harm the project's value, the collateral and the apartments that have already been sold in it, in addition to a perception where a discount on housing prices is a kind of 'taboo' that must not be taken as an option. This is exactly where the 'zero kilometer apartment' model can come in."
"A new apartment that has been completed, stood for a defined period and was not sold, will enter a separate and transparent pricing track. Instead of pretending that it is the same apartment and the same price as on the day of the project launch, it will be sold at a real discount that reflects its age and the accumulated financing cost. The apartment will remain new, just as a zero-kilometer car remains new, but its price will acknowledge that it is no longer part of the initial launch."
This domino does not stop at the contractors. It continues to the second-hand apartment market, where private sellers look at the prices of new apartments and conclude that their asset is still worth last year's peak price. The seller clings to the historical price he paid even when the apartments are not actually sold. The result is a chain of transactions that are not carried out. "A family cannot sell the existing apartment and therefore cannot purchase a new apartment," says Leibovitz. "The entrepreneur cannot sell the new apartment and therefore continues to pay interest to the bank. The potential buyer is waiting for a price drop, and the seller is waiting for the prices to return. Everyone is waiting, and the market remains stuck."
According to him, everyone who currently holds real estate inventory, whether it is a private person with one apartment or an entrepreneur with an entire project, has an important lesson to learn from car importers. The first step is to stop increasing the inventory at a rate that does not match the demand. When the market is saturated, continuing to create new supply without a solution for the existing inventory is like continuing to order cars when the lots are already full.
What should contractors do tomorrow morning?
"The second step is pricing according to today's real value, and not according to past expectations. There is no point in clinging to peak prices when the interest rate has risen, mortgage repayments have become more expensive and purchasing power has been eroded. Inventory that is not sold is not a passive asset that waits patiently. It generates monthly financing, maintenance, marketing and insurance costs. The longer you wait, the more of the possible profit is swallowed up. An open price drop in new apartments will encourage buyers to return to the sales offices, will allow entrepreneurs to pay off debts and free up capital for the next projects, and will also affect the second-hand market. Instead of holding thousands of empty apartments at prices that do not generate transactions, it will be possible to turn some of the inventory into real transactions and return movement to the market."
They are afraid of the domino effect.
"Whoever lowers the price first might acknowledge a loss or give up part of the profit they planned, but sometimes that is exactly the advantage. Whoever breaks the ice and prices first according to reality can clear inventory before the competitors, reduce their debt to the bank and continue to operate. Whoever waits for the whole market to lower prices together might discover that in the meantime the interest has eaten the discount they tried to avoid and that the apartments continue to stand as a useless burden.
"Ultimately, the difference between the two markets started with different rules of the game, but turned into a business culture. The car market internalized that standing inventory is a loss that must be managed quickly and soberly. The housing market in general and the state in particular still treat standing inventory as an asset that will appreciate on its own, even when the number of transactions drops, the apartments remain empty and financing costs accumulate.
What needs to be done for buyers to return?
"For buyers to return and the market to be released, it is not enough to offer more loans, defer payments or hide discounts within complex promotions. One must acknowledge that a price that does not generate a transaction is not a market price. Just as a new car that is not sold becomes a 'zero kilometer' car and is sold at a discount, a new apartment that has not been sold must also receive a new price that reflects reality."
