Supply is the key

More housing units need to be built to keep up with a combination of high natural growth and low interest rates.

By
June 15, 2015 21:24
3 minute read.
efrat

HOUSES IN the Jewish community of Efrat. (photo credit: REUTERS)

 
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No matter what criteria you use, housing prices in Israel are high and they have been for some time now. The cost of buying a home has climbed faster than inflation, rising 97 percent since 2007 (64% in real terms).

Israelis pay more of their monthly salaries to buy a home than do Americans or Europeans – in 2012, it took 135 average monthly salaries to buy an average apartment in Israel compared to 76 for a home in France, 71 in Spain, 64 in Britain, and 60 in the US. These trends seem unstoppable: a recent survey commissioned by the Guy Farbman Law Office found that 73% of Israelis do not expect housing costs to fall any time soon.

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Governments have come and gone vowing to bring down housing prices. The fight against global warming has been more successful.

Finance Minister Moshe Kahlon is the latest to rise to the challenge. Through skillful negotiations during the building of Prime Minister Benjamin Netanyahu’s government coalition, Kahlon managed to concentrate in his hands unprecedented power, which includes the construction portfolio held by Yoav Galant, No. 2 on Kahlon’s Kulanu list. Yet, will he succeed where others have failed? This has a lot to do with the amount of time he manages to stay in office. With a razor-thin coalition of just 61, this government is not expected to survive very long.

Another problem is Kahlon’s relatively narrow political base. He heads a party of just 12 MKs. To make unpopular reforms, Kahlon needs strong support within the cabinet, which he might not get.

But even if this government survives for a few years and even if Kahlon receives the requisite political support to carry out his policies, will he implement the sort of reforms needed to bring down prices or will he make the mistake of his predecessor, Yair Lapid, and choose a misguided policy similar to the zero VAT program? Preliminary signs are encouraging, though not all of Kahlon’s proposals make much sense. A good example of a reform that will at best be ineffectual is Kahlon’s decision, recently approved by the cabinet, to raise the purchase tax on residential real estate. Starting July 1, the tax for purchasing homes that cost up to NIS 4.8 million will go up from 5-7% to 8%. Taxes on homes that cost more than NIS 4.8m. will go up from 8-10% to 10%.

The goal of the tax hike is to discourage investors from buying properties to rent, which, it is hoped, will open the way for families to buy their own. But what will probably happen is that investors will continue to buy houses for investment, then rent them out at a higher price to compensate for the tax hike – or they will not buy, which will result in fewer apartments for rent on the market, resulting, again, in a rise in rents.



Another incoherent move in Kahlon’s reforms is what is referred to as the “dweller price.” In this arrangement, state land tenders are won by a builder, who commits to provide the lowest price for the purchaser. Investors who do not plan to live in the home are banned.

While this program, which has been implemented in the past, will undoubtedly lower housing prices, it will also lead to something else: a sharp rise in demand.

Demand is already too high due to low interest rates that make mortgages so attractive right now. What is needed is not more demand, but more supply. More housing units need to be built to keep up with a combination of high natural growth and low interest rates. Every year 52,000 new couples or individuals looking for a home are added to the market, but just 40,000 new homes are built. There is a dearth of at least 100,000 housing units and this number grows by more than 10,000 every year.

Kahlon must focus on removing the barriers to the building of new housing projects. In parallel, steps need to be taken to encourage young couples to buy houses in outlying areas. Many of Kahlon’s proposed reforms are aimed at increasing supply.

These include encouraging converting apartments used as offices into residential apartments; empowering local authorities and municipalities to rezone public land for residential projects; and combating bureaucracy and either reducing the number of officials involved in the housing planning process or streamlining the process.

Increasing supply is the key to success. Kahlon should keep his eye on that goal.

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