Analysis: Everything you wanted to know about housing

Will MK Kahlon, credited with reducing prices in Israel’s cellular market by allowing in more competition, be able to enact the same magic in housing?

By NIV ELIS
Housing protesters in Jerusalem 521 (R) (photo credit: Ronen Zvulun / Reuters)
Housing protesters in Jerusalem 521 (R)
(photo credit: Ronen Zvulun / Reuters)
Prime Minister Binyamin Netanyahu’s appointment on Sunday of Likud MK Moshe Kahlon to head the Israel Lands Authority was meant to bring hope to Israelis unable to afford buying their own apartments.
But will Kahlon, credited with reducing prices in Israel’s cellular market by allowing in more competition, be able to enact the same magic in housing? The real estate market is, unfortunately, a bit more complex.
To understand it, let’s start with how housing prices got so high to begin with.
“The biggest driver has probably been low interest rates,” explains Avner Buntman, CEO of the consulting company Mortgage Israel. As in the United States, he says, poor economic conditions caused central banks to set an “easing cycle” to try and stimulate economic growth. In other words, the financial crisis led Bank of Israel Governor Stanley Fischer to bring down interest rates to help boost the economy.
But in real estate, the rates don’t just affect the everyday people who want to buy (or sell) homes to live in. They also affect the banks that lend money in hope of making a profit, the construction companies that build new apartments, property investors who buy and sell real estate as an asset, and wealthy people who purchase second or third homes, either for vacationing or renting out.
Finding the right balance between everyone’s interests can be tricky.
When interest rates came down to pump money into the economy, investors also had access to cheap money for buying real estate. Because the investor class represents about a quarter of real estate transactions in Israel, their reaction to the rates had a big impact on prices for potential homeowners.
Fischer saw that low interest rates had unwanted repercussions in the real estate market, so he enacted a handful of “loan-to-value limitations” on mortgages in November to try to dampen the effects. People who have never owned a home can still get mortgages to cover 75% of their purchase, while investors racking up additional properties can only get loans to cover half of the cost.
“He’s trying to keep the interest rate low for the economic side of things and trying to make sure it doesn’t filter through to the real estate side of things,” Buntman says.
It was also important to Fischer to ensure prices don’t fall too quickly.
“It would not be healthy if there was a fall in housing prices that was too fast, but we do want to see moderate falls,” Fischer said in September. Why? Because similar to the US, a quick drop in prices could work its way into the financial system, which in Israel is also heavily exposed to housing. Homeowners stuck paying mortgages worth more than their newlycheap houses would plug up the housing market even more.
If prices fall more slowly, Buntman explains, homeowners and investors will react differently.
“Homeowners still rather own than rent, so the promise of lower prices won’t have as much of a deterrent effect on home-buyers as it would the investor side.”
Yet, as Fischer explained in a December interview with Richard Quest, the interest rates and financing only deal with housing demand, and any economics student knows that demand is only half the equation.
“Reducing the price of housing on the demand side does not cause more houses to be built, it causes less houses to be built. The real place that you can get action that will solve the housing problem is on the supply side.” That’s where Kahlon and the ILA come in.
Because the ILA controls some 93% of the land in Israel, its bureaucracy and red tape can affect how quickly, cheaply, and easily land becomes available for building new apartments.
“The story in Israel is a bureaucratic story,” says Asaf Eylon, a real estate lawyer at the Yigal Arnon law firm. “Outside of Israel, most of the land is private, so whatever transactions are tied to land aren’t so difficult.”
In addition to controlling the pace in which land is made available to the market, Eylon says, “the ILA is a very bureaucratic body that makes a lot of decisions that sometimes contradict each other or are very unclear.”
As the Knesset passes laws, government bodies enact regulation for zoning, environment and historical preservation and the courts makes decisions overturning some them, a great deal of uncertainty and delay comes in to play for construction companies who want to build new apartments.
The challenge for Kahlon, then, is not just to get the ILA to make more land available, but to make the process for building apartments on that land faster and more efficient.