Why are housing prices in Israel so high?

In Judea and Samaria, large areas of uninhabited state land, survey land (undetermined ownership) and land within settlements are available for building.

July 25, 2016 21:42

HOUSES IN the Jewish community of Efrat. (photo credit: REUTERS)

Simply put, affordable housing is in short supply.

A basic economic principle is that free markets are determined by supply and demand. When demand exceeds supply, prices will rise, and vice versa. Since Israel’s housing market is tightly controlled by the Israel Lands Authority (which owns 69 percent of all land), the Jewish National Fund (12%) and the Israel Development Authority (12%), and most of the available land for new building is in the periphery, far from urban centers, or designated as agricultural, another source of available land would ease the housing shortage and reduce prices.

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In Judea and Samaria, large areas of uninhabited state land, survey land (undetermined ownership) and land within settlements are available for building. Within commuting distance of the center, demand is high in the major settlement blocs.

Allowing more construction there would increase the supply and lower housing costs for purchasers and renters.

The problem is that Prime Minister Benjamin Netanyahu has implemented a building freeze for Jews in Area C of Judea and Samaria, under Israeli control. As a result, the supply of land and homes has barely expanded and therefore, with high demand, prices have risen. This policy has encouraged “rent-seeking” (those who seek to increase their wealth without adding any new wealth) and serves those who take advantage of the system, especially the tycoons. It reduces economic efficiency and actual wealth, and increases income inequality. It damages Israel’s essential interests and hurts consumers.

Strikingly, as housing prices began to surge late in 2008 and the Netanyahu-led government took office in 2009, there appears to have been a correlation between his policy of restricting Jewish building and low interest and mortgage rates, and the sharp rise in housing and rental prices. Low interest rates provided economic stability, but they also stimulated buying property as investment and speculation. And, since the supply of land and homes was restricted, prices skyrocketed.

According to Haifa University economist Steven Plaut, “Ironically, housing price inflation is a side effect of Israel’s economic success. Housing prices reflect economic wealth, and many Israelis have become wealthy.” But, most are not, as demonstrated by the widespread protest movement in 2011 against high prices and inequality.

Moreover, it seems to be a significant factor for Israelis who decide to leave the country.

When asked why they are leaving, or considering that option, Israelis often answer: the lack of affordable housing within commuting distance to the center of the country, where most of the jobs are, and/or places where their families live.

Meanwhile, Arabs who live in Areas A&B in Judea and Samaria, under the PA, in the Gaza Strip under Hamas and in eastern Jerusalem are building extensively and without restrictions. Official estimates are that there are over 100,000 illegally built Arab buildings. In eastern Jerusalem alone, the figure is at least over 10,000 – and increasing due to lack of enforcement.

Although the correlation between the rise in housing prices, low interest rates and building freezes is obvious, few have written about it – not the Bank of Israel, the Finance Ministry, economists at Israeli institutions, or journalists. There appears to be no basic research on the issue, or even an estimate of the potential demand for moving to Judea and Samaria. The reason is obvious: anti-settlement politics and fear of offending the international community.

As a result, Israelis suffer.

The high cost of housing is a major political issue. According to the Housing and Construction Ministry, buying a home in Israel costs on average the equivalent of 148 monthly salaries, among the highest in the OECD countries, up two months from last year and 43 months longer than in 2008/9. This is important in comparison with Europe, where average housing costs are two-thirds less.

Young families claim that they are being priced out of home ownership or even rentals in the urban economic centers of the country. The close proximity of Judea and Samaria is attractive, but since building there is frozen, prices even there are very high.

Major settlement blocs – Ma’ale Adumim, a community of over 40,000 Jews approximately 6 km. east of Jerusalem; Gush Etzion, a few kilometers south of Jerusalem, with 22 communities and over 70,000 Jews; nearby Beitar Illit and Modi’in Illit, in the center of the country, both with more than 50,000; and Ariel, with 20,000 in the Shomron – could easily expand. But the government has restricted building.

According to Israel’s Central Bureau of Statistics, Netanyahu has allowed much less building in settlements than any of his predecessors.

Instead, the government fiddles with the market and pushes tax schemes – none of which will increase the supply of homes.

Following the protest movement in 2011, a committee headed by Prof. Manuel Trajtenberg was tasked with formulating a new socioeconomic agenda. Its recommendations included the approval of 196,000 new apartments within five years, only 20% of which will be allotted for affordable housing.

But even this “reform,” like similar programs, was not implemented.

Ex-media celebrity Yair Lapid, who heads the Yesh Atid party, was appointed finance minister in 2013 in the hope of making reforms, and some of his economic programs were promising, but some (like the zero percent VAT) were not. Moreover, he failed to confront the monopolies and cartels and failed to make any serious changes; he was fired a year later.

Finance Minister Moshe Kahlon, who promised to cure Israel’s real estate woes, enacted a series of affordable housing schemes, including a program in which developers receive land at cut-rate prices and sell apartments at a discount to qualified first-time buyers. This would have no effect on the market; the windfall profits would be enjoyed by the developers.

As Prof. Plaut observes (“Israel’s Socialist Dreams vs. Capitalist Realities,” Middle East Quarterly, Summer 2016), “Kahlon proposed increasing taxes on “investments in housing” (as opposed to on housing consumers), presumably to drive “speculators” out of the market. But, how can the government distinguish between a housing consumer and a housing investor or speculator? Besides, many housing investors are also landlords. Driving them out of the market will only cause rental housing costs to skyrocket more than they have already as demand will once again outstrip supply.

As such, the proposal would simply siphon off some of the excess housing demand into the rental market, pricing all but the richest yuppies out of Greater Tel Aviv altogether.”

Some argue that, although the freeze is important, it has only tangential effect on overall housing prices, since Judea and Samaria is a small portion of market. That’s true, but if the amount of land and property available to consumers is increased significantly – i.e., if the freeze were ended – it would provide affordable housing at reasonable prices for thousands of families.

Ending the building freeze and employing Israel’s judicial system to decide issues of disputed land ownership in Judea and Samaria – rather than using a military administration – will create economic opportunity; ease financial burdens for young families; increase immigration and decrease emigration.

It will sustain and ensure the survival of the state. That is true Zionism.

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