Housing prices are a thorny problem in Israel. Price rises have been so consistent in recent years that many economists expressed concern of a price bubble – of the kind that wrought havoc in the US and many European countries. Ultimately, a Bank of Israel study concluded that there are no signs of a bubble.Even so, prices are very high. A recent study publicized by the Taub Center shows that measured in terms of local incomes, apartments in Israel are the most expensive among OECD countries. The price of housing was one of the main issues raised in this past summer’s economic email@example.com Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).In response to the concern over prices, the government and the central bank adopted a series of policy steps meant to increase supply and chill demand in the hopes of making a dent in prices. The aftermath: According to a survey published this week by the Central Bureau of Statistics, there has been a dramatic drop in the demand for houses.‘The number of dwellings sold in the third quarter of 2011 was the lowest since the fourth quarter of 2006, and it is 43 percent lower than the last quarter of 2010,” the report said. Prices for apartments also dropped late in the year, by over 1% in the quarter ending in October, it said.A reduction in prices due to an increase in supply would be welcome, but it would have been accompanied by an increase, rather than a decrease, in units sold. The lukewarm policy steps are also unlikely to have had such a farreaching effect. The most likely explanation, in my opinion, is that the protests have convinced people that the government will take meaningful steps in the future to lower prices, and so potential buyers are adopting a wait-and-see attitude, hoping for lower prices in the near future.We can certainly hope that meaningful steps will be taken to increase the availability of apartments and close the huge affordability gap between Israel and its peers.But Israelis will also discover that lower home prices are a mixed blessing from a macroeconomic point of view.For most households, their home is their most valuable asset, indeed the main reservoir of net worth. If prices go down here, the average Israeli household will take a huge hit to their net worth.In the United States, the main concern of the authorities right now is very low home prices, resulting in low net worth and low demand. (In the US this also led to financial distress as many houses became “underwater” – worth less than the mortgages. In Israel this is comparatively unlikely because of the high down payments required.) What we are experiencing right now is in some sense the worst of both worlds. Housing prices are declining, which results in a reduction in household wealth. Yet it is not the case that more apartments are being sold to young families. Policy should be directed toward turning this into the best of both worlds: making apartments more affordable without resulting in adverse macroeconomic affects from the impact on existing homeowners.