This bubble won’t bust, if we build over the Green Line

The apartments in Ramat Shlomo have brought to the fore the most severe problems in our troubled land: Geography and demography.

By NITZAN COHEN
Ramat Shlomo construction 311 (photo credit: Associated Press)
Ramat Shlomo construction 311
(photo credit: Associated Press)
A standard approval by a municipal housing committee for about 1,600 new apartments in east Jerusalem, an area that is already inhabited by 200,000 Israelis, is neither a surprise nor a time bomb. Israel has been settling citizens there for more than 40 years.
The Biden incident has done us a favor by shedding light on a broader issue that somehow escaped the brigades of journalists and publicists who spilt so much ink over it. The apartments in Ramat Shlomo have brought to the fore the most severe problems in our troubled land: Geography and demography.
Let us move away for a few minutes from the political arena to the more important, down to earth, every day issue: Housing. This is probably the most important segment of the global economy. Every young couple deals with the issue and for almost all of us, buying a home is the most important financial decision of our lives.
We all know what stood behind the current global recession: It all began when consumers in the world’s leading developed countries, especially in the US, borrowed much more than they could afford, taking out mortgages that led to a credit crisis. When the harsh reality of their true pay-back ability was revealed, everything collapsed in a blast that hit both lenders and borrowers.
Israel was very lucky to escape with only a few scratches thanks to the political system that was wise enough to maintain fiscal restrain. But an even more important factor was the conservatism of both Israeli consumers and the banking system, which were not carried away by the global credit hype and maintained a medium level of leverage and a high degree of risk control, most notably in the housing and mortgage sector.
While in the US foul methods, like the notorious Ninja (no income, no job and no assets) subprime loans, and 100 percent leverage, were common practice, in Israel you could rarely get a mortgage for more than 70% of the value of your home. When in California subprime borrowers were offered loans to buy a second home, in Israel the bank wouldn’t approve a mortgage with a monthly payback that was bigger than a third of your disposable income.
But this is now history. The great crisis in the financial market drove people out of financial assets while historical low interest rates made mortgages much cheaper. The feeling that the only safe assets are the old-fashioned ones, first and foremost solid buildings, combined with a wave of foreign Jewish investors rushing to buy homes in the land of the Jews as a kind of an insurance policy drove the prices of homes in Israel to the top.
But this is only part of the equation: the demand side. When the wave seriously started to accelerate by the end of 2007, it found the local real estate market with a serious lack of supply. While real estate markets in the Western world were booming in the beginning of the millennium, local builders were still licking the wounds from more than a decade of recession in their sector. Most of the serious players in the real estate market preferred to use their resources to invest in more appealing markets abroad, from the US to Eastern Europe/Russia. So the supply of houses and apartments was extremely low when the big wave of new demand hit the market.
All that led to an unprecedented surge in home prices. The price of an average four-room apartment outside Tel Aviv (but still in the center of the country) jumped 66%, from $150,000 in 2007 to $250,000 today. Since the average income during the same period rose a mere 4%, to around NIS 7,800 a month, it is not surprising to find that the average mortgage in the peripheral areas rose from NIS 350,000 to NIS 550,000, while in Tel Aviv it jumped more than 50%, to NIS 620,000. The bottom line is that more and more young couples and middle class families who needed to upgrade to bigger homes, had no choice but to load their shoulders with a much heavier burden. When considering the fact that interest rates can only go higher during the life of an average mortgage, and that the mortgage length itself surged by 3.5 years, the risk out there is even bigger. Eventually an ever growing number of families will find that the load is just too heavy and will default on their loans. That will ignite a reaction similar to the sad one we observed overseas.
Since the factors that feed the demand for housing: growing mistrust in financial assets, growing population and immigration, and low interest rates, are likely to continue and even to grow, the only remedy can come from the supply side. The state owns most of the land in Israel, so it is the government that has both the capability and the responsibility to deal with the possible catastrophe.
This is where the home prices-and-mortgages story meets the diplomatic incident that occurred during Vice President Joe Biden’s visit. The harsh truth is that in the heart of the country, the main area of demand, “between Hadera and Gedera,” has run out of available land. Builders are scratching for a few more hectares here and there, but basically the well has gone dry. Since the infrastructures did not keep up with the population and construction booms, life inside the cities is becoming more and more difficult.
The commonplace answer to that sad reality was always: so go south to the Negev or north to the Galilee. This is nonsense. Take the Negev as an example. This lovely desert accounts for about half of the country’s land, but it has become the nation’s dirty back yard. This is where we throw our garbage and our toxic waste. The situation in the Galilee is better, but even there we face problems with the local Arab population, environmental and ecological issues, and above all, the chronic problem of employment and the lack of proper work places.
The only solution to the housing distress lies beyond the Green Line. It is true in Jerusalem, where the only place to grow is to the north, the east and the south. It is true for Gush Dan, whose only true land reserve is located five minutes from Petah Tikva, in Oranit, Elkana and Ariel. If Israelis cannot expand to these areas they are doomed to lives of slavery to enormous debts and crazy real estate prices.
I know that millions of people live like that in many places on this planet, but do we really want to follow their example? Do we want to live in Mexico City or in Mumbai?
This column is not about Right or Left, historical rights or old misdeeds. It is about the mighty forces of life, the urge to reproduce and the daily struggle to make a living. It is about the modest dream we all share, Jew and Arab alike, for a home for our kids, our spouse and ourselves. These are the forces that will eventually dictate the reality in this little piece of land, no matter how many press conferences are held or how much energy is wasted over proximity talks, diplomatic gestures or columns in leading newspapers.
It seems that Netanyahu understands this point better than most of theplayers in the political arena. He reminded his detractors of the factthat building in east Jerusalem was the policy of every governmentsince 1967 and he knows very well that the ever-booming haredipopulation in our capital cannot afford even a single room in the heartof the city, so they must expand beyond the Green Line, which lost anypractical meaning a long time ago. There is no way back.
Thesame natural process that is taking place in Ramat Shlomo, Har Homa andBetar Illit will occur in Modi’in Illit, Beit Aryeh and Ariel. The USadministration had better understand this and abandon old conceptionssuch as the Green Line. US President Barack Obama is famous for hisability to think out of the box. Well, here is a box he needs to thinkout of fast.