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, several very important income and other expense items of every household are linked or partially linked to monthly or quarterly inflation.
The Madad shows the change in prices of a standard package of goods and services that Israeli households purchase for consumption. The index is published monthly by Israel’s Central Bureau of Statistics on the 15th of each month (see here).
Real estate is directly related to the Madad (Consumer Price Index) — the Index includes home maintenance prices and sub-indexes such as tenant-owned housing services and rent. Further, the vast majority of mortgages in Israel are linked to the CPI.
The Home Price Index which considers housing prices is published in conjunction with the Consumer Price Index, but is not included in the calculation of the CPI. This is because an apartment is considered to be an “investment” rather than a “consumption”.
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 Construction Cost Index, or sometimes the shekel-dollar exchange rate fixed on the day of the signing of the contract. The Construction 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 (tzamud le’madad), 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 of -1.0 percent (negative inflation), while the Building Cost Index changed by an aggregate of +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. From 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 in Israel have become more moderate in the past 20 years and are more similar to those common in Europe and America, the Madad or Consumer Price Index was a less critical part of daily life in Israel than in the past. The process of attaining a stable inflation rate took more than a decade. However, in the last year or so, inflation has been rising as a result of the COVID-19 pandemic and the war in Ukraine, among other factors, which has led to more sensitivity towards the CPI and other index lineages in Israel.
