Madad, Housing Index and Building Cost Index in Israel
The Madad, which is the Hebrew for Consumer Price Index (CPI) or rate of inflation, is followed very closely by Israelis since movements in the monthly index affect nearly every aspect of life in Israel from home prices, salaries, mortgages, transportation costs, or prices of fruit and vegetables, and other expenses. In brief, a number of very important income and other expense items of every household are linked fully or partially to monthly or quarterly inflation.
The Israeli CPI shows the change in prices of a standard package of goods and services which Israeli households purchase for consumption. The index is published on a monthly basis by Israel’s Central Bureau of Statistics on the 15th of each month (see here).
A major component of the Madad Consumer Price Index is the Israel real estate market—the CPI includes a housing index and sub-indexes such as tenant-owned housing services and rent. Further, the vast majority of mortgages in Israel are linked to the CPI.
In the case of contracts signed for the purchase of homes in Israel before the end of construction, each installment for payment is linked either to the CPI, the Building Cost Index, or sometimes the shekel-dollar exchange rate fixed on the day of the signing of the contract. The Building Cost Index is published by Israel’s Housing and Construction Ministry and Central Bureau of Statistics and is indexed in a similar way to the CPI.
If linked to an index, the outstanding amount owed on the purchase price of an apartment will go up if the relevant index goes up. However, if the index goes down, the purchase price of the property will not automatically come down since a base threshold index rate is fixed in the contract. Therefore it is advisable depending on the economic climate to consider the possibility of an acceleration of the schedule in payments, which could save a lot of money.
In 2015, the CPI changed by an aggregate -1.0 percent (negative inflation), while the Building Index changed by an aggregate 0.9 percent during the same period.
In general, there is a direct correlation between the Madad Consumer Price Index and interest rates. When inflation goes up, the Bank of Israel could be expected to raise interest rates to suppress inflation. In a historical perspective, Israel went through a hyperinflation period in the 1970s and 1980s, when levels increased steadily from 13 percent in 1971 to 111 percent in 1979, jumping to 191 percent in 1983 before reaching a peak of 445% in 1984. To bring inflation back to normal levels, the government put a total freeze on the price of all goods and services. As a result of this measure, inflation dropped to 185 percent in 1985. A year after the freeze was lifted gradually inflation fell to 19 percent. In the 1990s, inflation levels stabilized further and declined to 1.3 percent in 1999.
Since inflation levels have become more moderate in the past 15 years and are more similar to those common in Europe and America, the Madad Consumer Price Index is a less critical part of daily life in Israel than in the past. The process though towards a stable inflation rate took more than a decade.
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The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals before entering into any transaction.