Think about it: The affordable housing problem

After the housing market adjusts to the idea of wide-scale construction for rental, the private sector can be increased.

June 2, 2013 21:53
Tel Aviv apartment

Tel Aviv apartment 311. (photo credit: Courtesy)

Since 2008 the price of housing in Israel has risen by 50 percent, and especially since the social demonstration of the summer of 2011, the issue has featured regularly on the public agenda.

On April 29 the Knesset Finance Committee held a fascinating deliberation on the subject, with the participation of the governor of the Bank of Israel, Stanley Fischer. Professor Fischer offered a learned lecture on the economics of the housing market, and stated, inter alia, that in recent years rapid rises in the price of apartments took place in all the countries in which the financial system did not collapse as a result of the world financial crisis. So Israel is not unique or alone in this respect.

When we discuss the housing problem in economic terms we are speaking basically of supply and demand, which determine the quantity of apartments on offer, and their price. The second level of the discussion concerns bureaucratic constraints. The third level concerns social issues, and the extent to which the government has a responsibility beyond laying down the terms of the game, and regulation.

In purely economic terms the issue is quite straightforward: on the one hand, how many new apartments contractors are willing to construct at any given price level, and on the other how much demand exists for apartments at these various price levels. What affects the cost of constructing apartments is the cost of land, construction materials, planners and workers, financing (i.e. interest on credit), taxation, and the expected level of profits.

When one talks of this side of the equation within the context of the housing problem, one is talking about how the cost of these inputs can be reduced, and especially the cost of land, which is excessively high in Israel.

What affects the demand side is the general economic situation in the country, which determines whether people decide to purchase new apartments to live in or rent out, the availability of second-hand apartments, the availability and price of financing (i.e. mortgages), and demand from abroad (mostly foreign Jews). One of the anomalies in this sphere is that if the government tries to assist firsthome purchasers by softening mortgage conditions, demand rises and as a result so do prices.

In terms of bureaucracy the situation in Israel is catastrophic. Whereas in most other Western democracies it takes an average of three years from the time planning of a new building begins to its completion, in Israel the same process takes 12 to 13 years, largely due to red tape in getting building plans approved, and other bureaucratic harassments. One of the consequences is that many Israeli contractors have decided to build abroad, which of course does not assist in solving the housing problem in Israel.

Most of the debate on the housing problem concentrates on these two levels – the economic and bureaucratic, and so far this debate has not led to any significant change, not because these are not issues that need to be addressed, but because the real problem is on the third level – the social level and the role of government.

This is because most of the population groups who have serious housing problems are outside the game altogether: they simply cannot afford to purchase a home, no matter what the price, and questions such as the cost of land, or the conditions for a mortgage have no relevance for them.

We are talking in particular of weak social groups, including low-income earners, the unemployed and unemployable, many senior citizens, and many young couples who might eventually pull themselves out of their predicament, but are currently struggling to survive.

How many people are we talking about? Probably several hundred thousand.

Now, if you happen to be a social Darwinist, who believes in the survival of the fittest, then you might say that it isn’t the government’s business to solve the housing problems of the weak. But if you are not, experience has demonstrated that the problem cannot be resolved merely by playing around with market forces, but only through direct government action, including the provision of cheaprent housing for the weaker social groups.

MK Erel Margalit from the Labor Party has suggested that Israel follow the example of New York City, where under Mayor Michael Bloomberg wide-scale construction for rental has taken place in recent years. According to Margalit around 160,000 apartments have been constructed without the administration directly investing a single cent, by providing cheap land, offering tax benefits to contractors, and forcing banks and financial institutions to back social causes, including housing, as a condition for being allowed to carry out their ordinary business.

I must admit that I doubt whether this model would work in Israel. In 2007 the Knesset passed the “Law for Encouraging the Construction of Apartments for Rental,” which was based on a similar approach, but nothing much has happened since then, and Bank of Israel economists have commented that “the involvement of business bodies in offering housing for rental in Israel is extremely low, especially due to low yields and high operational costs.”

Several weeks ago a Ministerial Committee for Housing was established by the government under Minister of Finance Yair Lapid, to address the housing issue. Today (Monday) Lapid will be presenting to this committee a hodge-podge of measures designed to constitute the basis for a new government housing bill. From what has been reported in the media about these measures, they hardly constitute a coherent plan, and as in the past deal exclusively with economic and bureaucratic aspects of the problem, without any mention of social issues or the government’s social responsibilities.

What I would expect from the government is to act in the case of housing in Israel within the Green Line, especially with regards to housing for rent for the weaker social groups, as it does regarding housing and construction in Judea and Samaria. Though due to international pressure the government is currently much more restrained today in its construction activities in the settlements, it is still a fact that the government provides free land for construction in the territories, is directly involved in 50% percent of building starts there (compared to 18% in Israel within the Green Line), and is responsible for 35% of the investment in housing there (compared to 10% in Israel proper).

In order to bring about a change, at least in the first stage, I believe that the government will have to act directly, and not by means of the business community. Perhaps after the project gets under way, and after the housing market adjusts to the idea of wide-scale construction for rental, the part of the private sector can be increased.

Is our largely neo-liberal government capable of leading such a move? By the look of things it doesn’t seem to be heading in this direction.

The writer is a retired Knesset employee.

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