Deflating the housing bubble

In this tiny country demand so chronically exceeds supply that minor inducements simply will not light great fires under contractors.

November 20, 2010 23:03
3 minute read.
Housing in the Galilee.

galilee housing 248. (photo credit: Courtesy)

Last week, Prime Minister Binyamin Netanyahu appeared to have discovered the housing bubble, reacting with great urgency by summoning a dramatic press conference to address the ostensible emergency and announcing a set of short-haul remedies.

The Bank of Israel had already quickly adopted technical measures to cool the feverish market by making mortgages marginally more expensive. But the buzz and hype are quite belated. The bubble had been steadily inflating for years.

Back when he took office in March 2009, Netanyahu declared that one of his main priorities was to overhaul our housing market by thoroughly reforming the Israel Lands Authority (ILA), then called the Israel Lands Administration.

The idea was to cut through the red tape and make more land available for construction. Theoretically this could have deluged the market with potential construction sites, which, in tandem with reduced bureaucracy, would have significantly increased supply – supposedly enough to lower prices.

The plan held promise for the long-range, though there was plenty wrong with it. In all probability it was overambitious and not entirely realistic. But such reservations are moot because to date nothing has been implemented, despite the Knesset having given its approval of the reform in August 2009.

What’s holding it up? For one thing, some 200 old ILA framework administrators are to be laid off, but as of yet there’s no agreement on their severance terms. For another, no progress has yet been made on employment terms for officials in the revamped ILA. To facilitate meaningful forward movement, these labor relations snarls will have to be undone in a greater hurry than displayed hitherto.

IN THE meantime, Netanyahu now offers a string of minor quick-fix incentives to induce builders to finish their projects more speedily and thus perhaps cool demand. Among these is a 15 percent discount on the price of lands sold via ILA tender, which will apply to contractors who complete at least 80% of construction inside 30 months.

Additionally, the Betterment Tax would be reduced from 45% to 20% during 2011 only, again providing construction time doesn’t exceed 30 months.

Finally comes another anti-red-tape measure: having local authorities collect development taxes on public projects directly from contractors. Without this, municipalities are hard put to issue construction permits, generating considerable delays.

There’s nothing wrong with clearing away bureaucratic underbrush, as the above incentives to some degree are designed to do. But are these viable and sufficient solutions? Hardly.

It’s not as if the contractors willfully drag their feet. With current profits high they have every incentive – even without the new tax breaks – to build fast. Their problem is twofold: the time it takes to secure permits (which is where ILA reform is paramount) and the shortage of manpower.

As long as cheap foreign labor is hired, Israelis will shun construction and contractors will carp about worker shortages.

The vicious cycle must be broken.

Unfortunately contractors assert that the only panacea is to allow them to import into Israel 5,000 to 7,000 more Chinese laborers. But that is precisely what our economy and society must not countenance, even if in the short-run it gratifies the contractors. In the long-haul this is a recipe for societal disaster.

BUT THE biggest problem, still unaddressed, is the fact that the availability of large stretches of land in the highly desirable Central region is finite. Some privatelyowned land remains undeveloped because the proprietors are far from eager to tackle the gargantuan and convoluted tax issues that thawing their plots would entail and which the much-touted seeming quick-fixes do not fix. Additionally, contractors are hoarding vacant lots as calculated investments.

In this tiny country – with a relatively young population, immigration, upward mobility and real estate purchases by nonresident foreigners – demand so chronically exceeds supply that minor inducements simply will not light great fires under contractors.

Any credible solution must include, as a disincentive to speculation, higher taxation on lands owned by contracting firms (as distinct from individuals) but unused for over two years. It must feature a serious push to attract young IDF veterans to the building trades. And it must ensure that the stalled ILA reform is finally expedited.

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