The mortgage, the financial tumor at the heart of Middle Israelis’ dreams, toils and frustrations, found itself Tuesday morning on the operating table – only to end the day seeing the surgeon shoved to the pillory, where he was nearly lynched.
While Finance Minister Yair Lapid’s critics are economically authoritative, politically they may live to regret the hostility with which they greeted his latest attempt to deflate the housing market. The housing crisis fed Lapid’s electoral success.
It has been three years since the middle class thronged to the streets decrying the price of housing, food, tuition and whatnot. What was first voiced by students who set up tents at the foothills of Tel Aviv’s glitzy skyscrapers, saying they could no longer afford renting, soon uncorked a nationwide outcry that unveiled a pattern: educated couples who served in the IDF, were earning two salaries and raising one, two or three children, and felt enslaved by mortgages with no end in sight, with many in no position to take one out in the first place.
Indeed, with an average Israeli apartment costing more than 11 years’ worth of average salaries, as opposed to five years in the US, roughly four in Germany, and less than three in Sweden – the Israeli housing market is evidently deformed, and begs treatment.
And since Lapid’s voters are the very middle class that is bending under this burden, and since during his first year in office prices continued climbing, completing an 84-percent climb since 2008 – Lapid decided to move.
LAPID’S PLAN is simple: Since every firsthand apartment’s price includes an 18% value-added tax, the Treasury will not charge it from families purchasing their first apartment valued at NIS 1.6 million or less, provided that the family has at least one child and includes at least one spouse who either served in the IDF or did national service.
The beneficiaries of this tax break will be committed not to sell their new apartment for at least five years. They will save up to NIS 288,000. Considering that an average Israeli homebuyer borrows from the mortgage bank NIS 600,000, which is repaid over 25 years for a monthly NIS 2,750 – nearly a third of an average salary – such a discount, should it materialize, will significantly slash housing costs for struggling young couples.
To prevent contractors from pocketing the discount intended for the purchasers, the plan recommends that the state appraiser map and announce average prices in all parts of the country, which will then be imposed on the contractors.
Critics, joined among others by Bank of Israel Gov. Karnit Flug, National Economic Council head Eugene Kandel and the Hebrew University’s Prof. Omer Moav, say the plan will stimulate demand whereas the situation begs increased supply.
Flug and Kandel did not speak publicly, but reportedly voiced their opposition in a high-powered meeting that Prime Minister Binyamin Netanyahu held this week with Lapid and Construction and Housing Minister Uri Ariel. One official did speak publicly, the Treasury’s chief economist Michael Sarel, who announced his resignation in protest. The plan, he wrote in his resignation letter, “is mistaken almost from every possible angle,” because in addition to fueling already excessive demand, it will require new taxes in other parts of the economy to compensate for NIS 2 billion in lost VAT.
UNLIKE POLITICIANS who attacked him from the Left, the economists who attacked Lapid did so as conservatives who are skeptical about the impact of price intervention.
Many Israelis recall the precedent of 1981, when then-finance minister Yoram Aridor slashed sales taxes on assorted appliances.
The result was a consumer binge and an electoral windfall in gratitude for a populism that actually fueled hyperinflation, a market crash and Aridor’s political demise.
The fear now is that launching price controls through a bureaucracy like the state appraiser’s will prove impractical; that differential taxation will cause confusion and fraud; and that increased demand will create a black market, as homebuyers competing over price-controlled apartments will quietly offer to pay more in deals that neither they nor the contractors will fully report.
Finally, critics warn that once approved the plan will be appealed to the High Court of Justice, where it will be ruled as discriminating against the ultra-Orthodox and Arabs, who do not serve in either the IDF or in the National Service.
Lapid has more of a case than all this suggests.
THE LESSER concern from Lapid’s viewpoint is the High Court.
Unlike initial reports, the plan applies to single parents as well as gay couples. As for the haredim and Arabs, Lapid will say they are welcome to volunteer to do national service, and thus become eligible for the plan.
Such a day in the High Court will itself be politically priceless for Lapid, who will win a free opportunity to stand up for the combination of patriotism, liberalism and egalitarianism that fuels his political odyssey.
Whatever the High Court rules will be a victory for Lapid. If the plan is approved, his liberalism wins a valuable stamp of approval in the eyes of Labor voters, and if it is overruled, he wins patriotic accolades among Likud voters.
This political aspect is one that the economists Lapid faces are in no position to appreciate.
Economically, too, the fact that the plan will doubtfully prove effective does not mean it will be harmful.
For one thing, the new apartments to which this plan pertains (there is no VAT on secondhand apartments) add up to only 8% of real estate deals. Even if demand for them rises sharply, it will pinch – but not shock – the market.
Secondly, Israel has traveled a light year since the days when a consumer tax’s abolition fanned hyperinflation. Back then, the Bank of Israel took its orders from the Treasury, printing money whenever the politicians demanded it and begging their permission before raising interest rates. Now, should the tax break start pushing prices up, the Bank of Israel will quickly raise interest rates and chase all back to their financial caves.
Finally, Lapid’s detractors conveniently forget the lessons of his plan’s antithesis, America’s subprime crisis last decade. The analogy is of course flawed, as the problem there was not about too many people chasing after too few houses, but about greedy lenders seducing poor borrowers to take mortgages they could not afford. Yet in one respect the analogy stands, because there as here the government stood by while down in the market, bad things were happening that demanded interference.
The government here has tried repeatedly to interfere in the market’s workings, but so far the efforts were mainly on the demand side.
For instance, last year the Bank of Israel capped mortgages at 50% of a salary, three years after discouraging lending of mortgages worth more than 60% of an apartment’s value, by demanding the banks set aside additional reserves in such cases.
Such measures were, fortunately, much more than the American inaction when the subprime storm gathered. However, they ignored root of the problem, which lies neither in the financial industry’s policies nor in the buyers’ behavior, but in the construction industry’s output; there are, in Israel, more homebuyers than homes.
In itself, this shortage reflects the happy fact that Israel is demographically vital, unlike most economies – where surplus housing reflects not only market efficiency, but also demographic decline. The current government’s 23 ministers, for instance, have borne between them 73 children, and this is a government with no ultra-Orthodox members. Their peers throughout the developed world are not nearly as fertile. Israel’s is the developed world’s fastest growing population, and these are its reflections.
Add to that Israel’s small size, and its unique regulatory situation whereby 93% of real estate is stateowned and controlled by a cumbersome bureaucracy, and you get the shortage that no market intervention, whether by the Bank of Israel or Lapid – will undo.
The solution is well-known, and has been repeatedly preached by Netanyahu himself: privatize land.
If large portions of state-owned land are rapidly offloaded to the market, construction will accelerate and supply will meet demand.
However, when Netanyahu set out to realize this vision in 2009, he confronted a set of strange bedfellows, ranging from Labor – then in the coalition – which claimed such a reform would only benefit big business, through the religious parties, which said privatizing the Promise Land’s soil is biblically forbidden, to Moshe Ya’alon, who warned that privatization would lead to hostile takeovers.
Faced with this opposition, Netanyahu retreated, the shortage worsened, and prices soared.
Netanyahu never changed his mind on land reform, an idea Lapid shares with him, as does a third coalition partner, Tzipi Livni. Then again, Netanyahu is widely assumed to hope Lapid, who rose to political stardom at the Likud’s electoral expense, will fail as finance minister. It is the kind of assumption that will doubtfully ever be proven through a written document.
Yet whatever Netanyahu wishes him, Lapid has thrust housing into the center of the political arena, and touched off a dynamic that will ultimately force Netanyahu to deliver the land reform which the public may have forgotten, but the patient on his operating table must urgently undergo.