What can the government do to decrease housing costs? - analysis

With inflation on the rise in Israel, what actions could be made by the government in order to stabilize the rapidly rising cost of housing?

 View of a costruction site in the central Israeli city of Be'er Ya'akov, February 22, 2022.  (photo credit: YOSSI ALONI/FLASH90)
View of a costruction site in the central Israeli city of Be'er Ya'akov, February 22, 2022.
(photo credit: YOSSI ALONI/FLASH90)

The release of the latest statistics on inflation in Israel indicate yet another rise in the cost of housing, showing a consistently upward trend that has left many rent- and mortgage-payers forlorn. While there isn’t much that can be done by consumers themselves to reduce their housing costs (unless they want to live in smaller homes or cheaper locations), the government has a few options to pursue if it wants to alleviate some of the pressure.

First, some context: Housing prices have risen recently as a result of several factors, notably a slow period in the amount of housing construction that allowed supply to fall behind demand, culminating in not enough places for people to live. The reasons behind that period include construction dwindling as a result of the pandemic in 2020, as well as regulatory activity and tax adjustments that acted as barriers to investors.

The foremost action that needs to be taken to solve this problem is an increase in the supply of housing via new construction. “At the end of the day, we need to see a lot of new housing construction in order to balance the harsh price increase,” said Prof. Dani Ben-Shachar, director of the Alrov Institute for Real Estate Research and faculty member at the Coller School of Management at Tel Aviv University.

But that alone wouldn’t make the problem suddenly disappear, because, as he put it: “It takes time to develop land. So, even though reports say that in the last year, there was an increased amount of land supply, this land will take a minimum of two or three years – if not five or more – to yield housing units.”

“We have a very high rate of population growth, about 1.8% per year, which is the highest among OECD countries”

Professor Dani Ben-Shachar
 ISRAELIS SET UP tents last month on Rothschild Boulevard in Tel Aviv, to protest against the soaring housing prices in Israel and social inequalities.  (credit: TOMER NEUBERG/FLASH90) ISRAELIS SET UP tents last month on Rothschild Boulevard in Tel Aviv, to protest against the soaring housing prices in Israel and social inequalities. (credit: TOMER NEUBERG/FLASH90)

Every year that new housing isn’t made available, however, the gap between supply and demand stands to widen. “We have a very high rate of population growth, about 1.8% per year, which is the highest among OECD countries,” Ben-Shachar explained. Such a high rate demands more new homes every year, besides any interest from investors or speculators within the market.

“We need approximately 60,000 new housing units every year due to population growth,” he said. “It doesn’t matter if it’s going to go through the rental market or through the homeownership market. At the end of the day, these people need a housing unit in which they can live.”

What do we need now?

Regarding whether prices will go down in the near future, at least one thing needs to be clarified: the Finance Ministry and Central Bureau of Statistics have reported a decrease in the number of mortgage transactions in July – which could indicate two opposite scenarios.

“A decreased number of transactions could result from two things: decreased supply, or decreased demand,” said Ben-Shachar.

If the cause is decreased demand, the market could actually be approaching equilibrium. “If that is the case, this would pressure prices downwards,” he said. “However, it could be due to a decrease in supply – there’s just not enough new construction. If this is indeed the case, we will not see prices coming down.”

Another factor to consider is how the public chooses to respond to the market. If buyers choose to “wait out the storm,” so to speak, a lack of purchases could lead to prices lowering in order to meet consumer expectations. However, the more likely scenario is that buyers, believing that the market will continue to rise, will attempt to snap up whatever they can while they can still afford it, which will, in turn, reinforce the increase in prices.

The government has the opportunity to place a finger on the scales in that equation, by making it very clear that they are willing to step in and keep things from getting out of hand.

“If the government delivers any notion to the public that they are taking on the mission to stabilize prices in the market – and if this message is delivered in a believable way – this could have an effect on demand,” said Ben-Shachar.

Such an announcement could ease consumer concern about missing their chance to buy and allow for relaxation in market prices – but it doesn’t seem to be the message that the Finance Ministry or other relevant authorities are currently communicating.

It remains unclear just how rough the market will need to be before that kind of intervention takes place – and until then, consumers may want to get their camp stoves ready.