Viable solutions for affordable housing

The citizens of Israel spoke in the recent elections: stop the rhetoric and provide real answers to make housing affordable.

By RON DILLER
A laborer works on an apartment building under construction in the Har Homa quarter in Jerusalem (photo credit: REUTERS)
A laborer works on an apartment building under construction in the Har Homa quarter in Jerusalem
(photo credit: REUTERS)
In my previous article, I addressed how housing prices in Israel are unsubstantiated compared to other cities like New York and San Francisco, with a gross imbalance between family incomes and home prices.
We found that a typical home in Tel Aviv requires the buyer to provide 65 percent of the purchase price, with the balance coming from the bank. This is because the average salary in Israel can only support a bank loan of 35% of the purchase price. This is totally absurd. Who in Israel can save up this huge sum of money when the salaries are less than half what they are in the US, where the typical down payment on a home is between 5%-25%? One solution is for local governments to place mandatory restrictions on all approved housing projects, requiring them to set aside a minimum 10%-15% of the units for affordable housing. In order to offset this cost, cities generally allow the developers to build at higher densities than is typically allowed under the zoning ordinance. In cities like Sunnyvale, located in the San Francisco Bay Area, their is a long-standing program that allots 10% of all multifamily units as what are designated as “Below Market Rate” (BMR) units, that are actually given over to the housing authority of Sunnyvale, with the city selling the homes to median-income families that meet a stringent set of financial requirements.
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The US government has many affordable housing programs, however I will address only a few, and show how these types of approaches can be incorporated into Israel.
HUD (Housing Urban Development), a department of the federal government, offers many programs for families of low to moderate income levels. The most prominent program, called Section 8, is managed by the US Department of Housing and Urban Development. This program provides financial relief to low-income families through issuance of vouchers more commonly known as “the Housing Choice Voucher” program, which pays a large portion of the rents and utilities – up to 95% of the rent – for about 2.1 million US households. However, this is predicated on renters having family income levels ranging from 50% to 80% of the lower income limits of the median income for the county or metropolitan area where the home is located.
Section 8 also authorizes a variety of “project-based” rental assistance programs, under which the owner reserves some or all of the units in a building for low-income tenants, in return for a federal government guarantee to make up the difference between the tenant’s contribution and the rent. A tenant who leaves a subsidized project will lose access to the project-based subsidy.
HUD and the US Department of Veterans Affairs (VA) have also created a program called Veterans Affairs Supportive Housing (VASH), or HUD-VASH, which distributes roughly 10,000 vouchers per year at a cost of roughly $75 million per year to eligible homeless and otherwise vulnerable US armed forces veterans. This program was created to pair HUD-funded vouchers with VA-funded services such as health care, counseling, and case management.
The Federal Housing Authority (FHA) has been around since 1934 and is a part of HUD. FHA will finance up to 96.5% of the purchase price of a home, representing a 3.5% down payment. FHA loans are currently running around 3.625%-3.750% for a 30-year fixed rate mortgage. Then you’ll have to add mortgage insurance, which can be another .50-.70 basis points that have to be added to the interest rate, taht altogether equals 4.125% to 4.45%.
These are only a few of the US federal government programs available to assist homebuyers or renters to make housing affordable. In Israel, the Israel Lands Authority owns and manages approximately 97% of all land, comprising some 19.5 million square meters. This makes the process much easier as land in Israel represents around 50% of total costs when constructing an apartment building. In the US, they don’t have this luxury and these programs are funded entirely by taxpayer dollars.
WITH THIS immense asset base, the government could leverage the land and float a 30-year long-term bond whose funds will be used to provide financing up to 97% of the purchase financing as for low- to median-income family households. This will avoid having to increase taxes. If the Israeli government removed the cost of the land, this would reduce the price of apartments by 50%. On a macro-economic level, the government could set aside a certain percentage of land in each city for affordable housing, and adopt specific ordinances.
Of course in order for this to be effective, it’s essential that all housing be close to public transportation and jobs. If we say the average apartment in Tel Aviv costs NIS 2.8 million, subtracting the land price reduces that figure to NIS 1.4m. to the new buyer. If the current average family income in Israel is NIS 19,653 a month, that means NIS 6,650 can be put toward the mortgage. For this example, if the State of Israel funds 97% of the purchase price as a 30-year loan secured as a first deed of trust against the property, which in this case would equal NIS 1.358m. earning a fixed rate of interest of 3% per annum, the monthly principal and interest payment would be NIS 5,600 per month; well within the financial limitations.
So, the actual down payment required in order to purchase a new apartment under this new proposed scheme would only be NIS 40,700 ($10,175) – a far cry from the current 65% required for a down payment, equating to a sum of NIS 883,000 ($221,000). Of course such programs would also fuel the economy so this becomes a win-win situation for everyone.