The housing trap

Israeli homeless, those who decide to support them must continue the fight until reasonable proposals are made and rules become fair.

By GABRIEL BACALOR
March 14, 2012 22:24
3 minute read.
Housing [illustrative]

Housing trailer hillside city view 390 (R). (photo credit: REUTERS)

 
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The patience of “outraged” Israelis is running out. The central problem is expressed in the cost of housing. What is behind the high prices of property in Israel? Half a year has passed since their massive march, and “outraged” Israelis continue to demand social justice.

Despite the efforts of the Trajtenberg Commission to offer a systemic solution to the inequity, Netanyahu’s government’s inability to reduce the cost of living is clearly seen in the housing sector, the core of the discontent.

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As a fourth of family expenditures in Israel go to cover residential costs, conflicts of interests within the ruling coalition make public plans to build housing as recommended by Manuel Trajtenberg a chimera. Why is the current Israeli government unable to reduce housing prices? What are the interests that underlie social demands?

Looking beyond the electoral demagogy, it is possible to see some answers.

HOUSING SHORTAGE

The main reason for the Israeli housing shortage is the limited range of real estate. With only 105 residential units per 100 households, a ratio that is among the lowest in the developed world, Israel offers 30,000 new properties per year, compared to a growing demand for over 40,000 homes annually. This supply deficit is compounded by the large amount of property acquired for investment purposes and not available for rent. At present, according to the Israel Electric Corporation, this amounts to 47,000 housing units.

Netanyahu’s intention to reduce the size of government is only theoretical when it comes to giving up the attractive returns the Tax Authority receives from the real estate sector. The government’s annual income from fees and property taxes is, at present, close to $1.8 billion. Expanding the range of real estate through social housing could reduce market prices, but would in turn shrink government revenues at a time when the Jewish state requires a financial cushion to deal with the uncertainty generated by the Iranian nuclear threat and the unstable political situation in the Arab world.

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In the past four years, Israeli home values have increased on average by over 40 percent and the cost of construction has followed suit, so that lower prices would not be well received by the banking system or by construction companies, the two sectors which finance most of the ongoing building projects. A reduction of real estate prices would push contractors to resign part of their return, currently about 20%, creating incentives to curb future investments, and therefore replacing the current private investment with public expenditure, rather than expanding the supply of existing properties.

One of the fundamental questions is whether the fall in prices would really benefit most of the “outraged” in Israel. According to the consulting firm TrendIT, 49% of the participants of the “March of the Million” belonged to the richest 30% of society, and 87% to the country’s wealthiest half. Many protesters already have a home, and if property prices come down, this same social strata would experience a reduction in their net asset value.

The Trajtenberg Commission’s recommendation to build 200,000 new homes in the next five years to reduce the cost of housing could halt the rise in prices in the short term, but would hardly stop the pricing trend in the long run, which from 1968 until today is estimated at a rate of 2% plus inflation per year.

Despite the loud claims to the contrary, most of the Israeli players in this field will benefit if housing prices remain as is, or rise, including the government, banks, builders and property owners – even a large number of the demonstrators in Tel Aviv. It is therefore likely that in the coming months, measures will be aimed at reducing the bureaucracy to encourage investors to buy property in Israel.

Faced with this housing trap, the Israeli homeless and those who decide to support them in a show of solidarity, must continue the fight until reasonable proposals are made and rules become fair. In the words of Martin Luther King, “Injustice anywhere is a threat to justice everywhere.”

The writer is managing director of Bacalor Strategic Consulting: www.bacalor.com

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