Despite the steps taken by the Bank of Israel the Housing Ministry and the Finance Ministry to cool the real estate market and curb the rise in prices, the market is still “boiling” and prices are still going up.

Why is it that prices are still rising despite the fact that the Bank of Israel has hiked interest rates, increased the cost of mortgages to investors, and the Housing Ministry has increased the supply of building land? Furthermore, housing starts reached 40,000 in 2010 and will in all probability reach 40,000 this year which supply is rising.

So why are prices rising? To get some answers, Real Estate assembled a panel of experts to discuss these and other issues pertaining to real estate in Israel.

The panel consisted of the following participants: Liat Danino-Israeli, general manager, Ambassador Real Estate Arnon Fridman, general manager, Ashdar Construction Company Adina Hacham, director general, Anglo Saxon Real Estate Motti Kidor, director general, the Association of Contractors and Builders in Israel Eti Langerman, director general, Discount Mortgage Bank Nadav Livovsky, VP marketing and business development, Beit Yair Construction Ofer Sagiv, general manager, May Tal Construction Company MK Carmel Shama Hacohen, chairman of the Economic Committee of the Knesset, who deals with real estate issues in the Knesset Didi Yedidya, general manager, Rotem Shani Development Moderator: Juan de la Roca, The Jerusalem Post

■ Moderator: How does the panel view the current state of the real estate market?

MK Carmel Shama Hacohen: The current state of the real estate market in Israel is very worrying. The Bank of Israel is very worried because rising prices can harm the economic stability of the country. And the political world is worried because rising prices are worsening the socioeconomic divide, which is already wide. The state of the real estate market has become the number one issue in political circles. I am a member of the ruling Likud party, and I am well aware that unless we solve the problem of rising real estate prices, in the next general elections we will cross over to the opposition benches. Finance Minister Yuval Steinitz will have to do what is necessary to bring down real estate prices because it is his neck, too.

I don’t want to give the impression that I see the real estate problem as political problem only because it is not. When the number of newlyweds who cannot afford the current real estate prices is constantly rising, it is a serious social problem with political overtones of course . All the steps that have been taken up to now have not solved the problem, so more effective steps must be taken.

Motti Kidor: The problem of the real estate industry is not the hefty rise in prices -- which is merely a symptom of the malady -- but the malady itself, which is a chronic lack of housing. During the past decade, demand has exceeded supply. And when demand is greater than the supply, prices rise.

Granted, steps have been taken by the Bank of Israel to curb demand by increasing interest rates. But it is a mistake to tackle the problem primarily by trying to curb demand. The problem is one of supply, and nothing is being done in this area. The Israel Land Authority has increased the amount of building land made available to the industry, but land in itself cannot solve the problem of insufficient supply. The developers may have land available, but there is a severe shortage of labor, and it will be impossible to increase housing starts and housing completions even though land is available.

■ Moderator: Despite the shortage of labor, housing starts in 2010 amounted to nearly 40,000 units, which is more or less the annual demand. That means you are meeting the expected demand with the labor available.

Motti Kidor: Yes, we have increased housing starts, but housing completion has fallen. Because of the labor shortage, it takes longer to finish a building project. Consequently, housing completions in 2010 totaled only 32,000, and I doubt that the numbers will increase this year. But housing completion is what makes housing available on the market. Housing starts alone will not bring down prices. The chronic shortage of housing is what is driving prices up. The shortage of housing starts and housing completions during the past decade has created a cumulative shortage of 100,000 dwellings.

In my opinion, the reason the government measures are not taking effect is that there is no coordination among government bodies. Not one ministry but many are involved in the process of authorizing building permits and the other aspects of real estate. The ministries of the interior, housing, finance and the environment all have a say in authorizing building projects. The Industry, Commerce and Labor Ministry is in charge of issuing permits to foreign construction workers. And there is very little coordination among all these august bodies.

MK Carmel Shama Hacohen: I beg to differ when you say that the increase in housing starts will not affect prices. If the public realizes that supply is increasing, it will have a psychological effect.

Ofer Sagiv: I agree with Kidor that the government is trying to curb demand instead of trying to increase supply. I think it was a mistake on the part of the Bank of Israel to raise interest rates. It will not curb investment demand, but it will make it more difficult for newlyweds to buy a home because their monthly mortgage payments will be higher.

When analyzing the reasons for the rise in real estate prices, one must take into account rising construction costs. The public wants better designed homes with more gadgets, such as electric shutters, electronic infrastructure, marble lobbies, etc., and this increases costs. There is also the problem of the constantly changing regulations, such as two parking spaces per apartment and green construction methods. All these increase costs, which increases housing prices.

Most land in this country is owned by the state through the Israel Land Authority. It has increased the supply of building land, but the price of land is rising constantly.

There is much talk lately of canned demand, but the rising building costs have created a situation where there is a canned price syndrome. Prices are rising less than is warranted by rising costs, The added costs due to the changing regulations may amount to a few percentage points in expensive real estate, but as these regulations cover expensive as well as inexpensive housing and their cost is more or less constant, it amounts to a much higher percent in an inexpensive dwelling .

■ Moderator: The Bank of Israel raised interest rates because of the rising inflation and because long-term negative rates of interest are harmful to the economy. Mr Yedidya, from what we have heard up to now, it is evident that prices in 2011 will continue to rise because demand will continue to exceed supply. Under these circumstances, is the industry still profitable?

Didi Yedidya: Before answering your question, I would like to point out that the policy of the Bank of Israel – to increase interest rates -- may have been influenced by rising inflation rates and the harm caused to the economy by negative rates of interest, but the fact remains that it has a harmful effect on that same class of people the government wants to help – low-income families who want to buy a home. For them, any rise in monthly mortgage payments is an added financial burden. In my opinion, rising interest rates do not alleviate the shortage of housing -- they aggravate it.

With regard to your question, I believe that prices will keep rising, but this will not prevent my company from building new projects. We check and double check every new project to see if it is potentially profitable. And if it is, we go ahead. Every business venture carries an element of risk, but we believe that the demand for real estate is rigid, and we are not taking any unreasonable risks.

MK Carmel Shama Hacohen: I disagree with those who talk of a shortage of housing. That would be true if there were tent cities on the outskirts of our cities or a large number of homeless, but that is not the case. It is true that many cannot afford current prices, but they have a roof over their heads by renting or by receiving family help.

■ Moderator: Ms. Langerman, everyone agrees that the price of real estate is very high and is rising. This means increased mortgages. Can the average family afford the monthly mortgage payments at their current levels?

Eti Langerman: We are quickly reaching a point where the average Israeli family will not be able to meet the required monthly mortgage payments necessary on a mortgage. An average mortgage has risen from NIS 600,000 to over NIS 700,000, which means monthly payments of over NIS 5,000. We think the maximum acceptable monthly payments should not exceed 33% of net income. Not many households have a net monthly income of NIS 15,000. Consequently, we are much stricter in our criteria. We authorize smaller mortgages, etc.

I would like to refute those who have attacked the Bank of Israel for raising interest rates. It is true that it is not affecting prices and it is increasing the price of real estate, at least for those taking out a mortgage, but the fact that the central bank is doing “something” is a good sign.

■ Moderator: Ms. Hacham, your 2010 results were excellent, which means that despite the rise in prices, demand is not affected.

Adina Hacham: In 2010, 108,000 real estate transactions were recorded in Israel, and the number increases every year. The demand for real estate is rigid because buying a home in this country has an emotional factor. Families want to own the house they live in, and they are willing to make the necessary financial sacrifices. That is also the reason for the small number of foreclosures. Home owners will do almost anything not lose their homes.

The rise in real estate prices may not have affected demand, but it is changing thre pattern of demand. The high prices in such places as Tel Aviv and Givatayim are pushing home buyers to more peripheral areas where prices are lower.

Arnon Fridman: Demand in the peripheral areas is increasing, and not only in those areas close to Tel Aviv. At Ashdar, we are expanding our area of operations and are building in Or Akiva and Rehovot. Since demand is increasing in these areas, we are willing to undertake any building project in a peripheral area that is potentially profitable. The continued rise in prices is due to the shortage of land, an endemic problem in a small country like ours.

Liat Danini-Israeli: The rise in real estate prices affects newlyweds and young families who have been outpriced. But there is a very quick and easy way to reduce prices for these buyers. Many municipalities, such as Netanya, do not authorize building small three-room apartments; they authorize only large apartments of four rooms and more, over 100 square meters or more. If they allowed smaller apartments, which would be cheaper, it would enable more young couples to buy homes.

■ Moderator: Mr. Livovski, your company is building primarily in Jerusalem. Are there any particular problems in Jerusalem?

Nadav Livovsky: In Jerusalem there is a severe shortage of building land, and this affects prices. I know there is a shortage of land in the whole country, but in Jerusalem it is acute.

With regard to the price increases in Israel as a whole, I think that steps that can halt the rise in prices are not being taken because the Treasury is reluctant to do so. Taxes in the real estate industry yield NIS 14 billion. They do not want to kill the goose that lays the golden eggs.

■ Moderator: Does the panel believe that the prime minister’s new plan to set up special housing committees with far-reaching statutory powers will hasten the issuing of building permits and increase housing starts? It worked in the 1990s during the great wave of immigrants from the former USSR.

Motti Kidor: I must congratulate the prime minister on his courage. The plan goes contrary to many vested interests because the new committees will have the power to disregard bureaucratic impediments. But having said this, I doubt that the plan will succeed. There is no ready land available, and the planning process to designate building land will take a few years.

You mention the situation in the early 1990s.

Things were different then.

The government took over the implementation of the project furthermore they undersigned the building process by guaranteeing the purchase of every dwelling built under the plan. They promised the builders a bonus for early completion of the projects, and there was less regulation. Consequently, the dwellings were of a lower standard than today, and it took less time to complete them.

■ Moderator: MK Shama Hacohen, many of the panel members have accused the government of lack of coordination and accused the Finance Ministry of deliberately doing nothing. When dealing with the issue of rising prices, they disregard the fact that there is a shortage of construction workers. You are not the government, but you are the chairman of an important Knesset committee. Can the Knesset force the government to take the right steps? After all, the Knesset is sovereign, and the executive branch of the government is subject to the legislative branch.

MK Carmel Shama Hacohen: Constitutionally, it is as you say. In practice, it does not always work that way. But on this issue, it is different. The Economic Committee of the Knesset which I have the honor of heading has debated the problems of the real estate industry thoroughly. We regard the constant rise in housing prices as one of Israel’s main problems. I have already warned that if the government does not take measures to alleviate the problem, we will initiate a flood of private legislation that will force the government to do what it has to do. I want to point out that if we take the necessary steps, we will be able to bring down real estate prices by 10%.

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