As the Israeli shekel strengthens against the US dollar, real estate transactions in Israel are now frequently quoted in Israeli shekels rather than in US dollars, as used to be the case.
How does this trend affect Israeli real estate contracts?
When the US dollar was on the rise, rather than the shekel, contracts were usually quoted in US dollars and sellers would get more shekels for their apartments as the dollar rose. Foreign purchasers did not lose out as long as they converted their dollars on the day of payment. The only losers were those purchasers who were holding Israeli currency. As the dollar exchange rate rose, they needed to find more shekels to make their payments.
Needless to say, this situation caused an enormous amount of tension between the parties to real estate transactions. If the purchaser was late in making a payment, a reason would often be found to blame the seller, so that the purchaser would not have to foot the bill if the dollar rate increased during the delay.
In the last two years, however, the US dollar has fallen considerably and the situation today is very different. From an all-time high of 4.7 shekels to the dollar at the beginning of 2006, the rate has recently fallen to below 3.5 shekels to the dollar.
This has caused a new trend in real estate transaction in Israel. Some sellers have been insisting on quoting the price in shekels with no linkage to the dollar. Others have continued to link the price to the dollar but are stipulating a particular rate of exchange as a floor below which the rate cannot go. This means no risk for the seller and all the risk for the buyer. If the rate of the dollar goes up, the seller receives more shekels, and if the rate of the dollar goes below the rate on the day the contract was signed, the seller receives the rate set in the contract and no less.
This new trend makes life difficult for foreign purchasers who have dollars or other foreign currencies whose rate is falling against the shekel. Foreign purchasers of Israeli real estate have to change the way they look at the deal so that they can navigate their way financially.
Firstly, as soon as the contract is signed and the price in shekels is set, a purchaser from abroad should take stock of how much of his own currency he needs to pay the price of the apartment and the rest of the closing costs. At this point it would be wise to convert the money to shekels to ensure that there is sufficient money to cover the payments.
Many purchasers are accustomed to leaving their money in foreign currency and converting it as needed. This was reasonable when the dollar rate was on the rise, but when the dollar rate is constantly falling this could be disastrous. If the money for the apartment is kept in foreign currency in a situation where the price has been set in shekels and the rate of exchange of that foreign currency falls, the purchaser may end up paying more for the apartment than he may have budgeted.
Of course the opposite is also true. If the purchaser converts his foreign currency as soon as the contract is signed and the dollar rate happens to rise he will have lost out.
The possible issues with foreign currency exchange can be negated if a purchaser can find a seller willing to accept dollars. The price in the contract is written in dollars and all the payments are made in dollars. However, this is only possible when buying a property second hand. Construction companies write the shekel amount in the contract and the payments are made in shekels, linked either to the Israeli Consumer Price Index or the Building Index.
In most instances the price of apartments purchased from a construction company are linked to the Building Index. On 15th day of each month the Israeli Bureau of Statistics publishes the building index for the previous month. If the index goes up, then the outstanding amount owed on the price of the apartment goes up as well. Anyone studying the behavior of the building index over the years will see that the building index goes up a lot during the summer months and not so much, if at all, during the winter months. It is therefore wise to make the bulk of the payments before the summer months begin. Your money is protected by a bank guarantee.
Many people convert their money into shekels immediately and then make the bulk of the payments before the end of May.
Whether you are planning to buy a new property, or a second hand apartment, it would be prudent to consider how the state of the economy may affect your transaction and plan accordingly.