You want housing prices to come down? Let City Hall have the VAT

This is no panacea. The municipalities will need to be supervised centrally, and there is state-level infrastructure in dire need of development.

Tel Aviv skyline  521 (photo credit: Marc Israel Sellem)
Tel Aviv skyline 521
(photo credit: Marc Israel Sellem)
As they search for a solution to rising housing prices, our officials need not look far. Housing supply is constrained by many factors, but chief among them is the government mechanism itself – the centralist bureaucracy which blocks, complicates and raises the cost of the process of housing construction. The price of this is borne by municipalities, which are forced to pay for much of the necessary infrastructure; the entrepreneurs, who need to become experts in the procedures of zoning committees, and close friends with their members; and the Israeli households, who simply have to pay more for their apartments.
Much has been written on the state monopoly on land in Israel, exercised through the Israel Land Authority and the Jewish National Fund, on the long and arduous planning and approval processes, and on the fact that much of the recent shortage of land for housing construction in central Israel was deliberate, motivated by a grand vision, full of good intentions, of pushing economically strong households from central Israel to the periphery. It is all true. However, despite past failures, the central planning administration has recently stepped up its game, and right now there is land approved for construction sufficient for about 300,000 housing units, more than enough to meet existing demand, even in central Israel.
The main obstacles for housing construction are currently at the municipal level. As things stand, a responsible mayor, looking out for the best interests of his or her constituents, will block high-density residential projects. Such projects necessitate large investments in infrastructure – roads, parking, sewage, schools and health clinics, not to mention playgrounds and parks – otherwise living conditions will worsen, for current as well as future residents. The addition to city taxes is far from covering these costs. The state bears responsibility to build and finance some of this infrastructure, but since there are many government bodies involved, the funds get delayed, and the municipality, which ends up paying for most of it, categorically replies: “not in my back yard.”
This conflict of interests between the state and the municipalities is no secret. One of the main successes of the government in expediting construction is the reintroduction of top-level accords, in which the state pays the municipality billions of shekels and assures them that each government ministry will meet its obligations on time. In return, the municipality commits to promote construction without delay.
This has already been done in Modi’in, Kiryat Gat and Rosh Ha’ayin. The problem is that these accords fit only large-scale, thousands-of-apartment-type projects, as it is impossible to coordinate between the ministries and negotiate with the municipalities over a large number of small projects.
In effect, municipalities compete on attracting businesses (commercial and industrial zoning) and high-income households (low-density luxury housing), and on deterring lower-income households (high-density residential projects). In addition, the conflict of interests between the municipalities and entrepreneurs, who seek to promote high-density projects since these maximize their revenue from land, may lead to corruption (the buying of permits), in which some of the profits end up lining private pockets instead of funding the necessary development.
The need for intimate familiarity with the planning apparatus also serves to limit the entrance of competition. The result of the current order of things is limited construction, under-funded infrastructure, and corruption.
There is a simple solution: the state should relinquish some of its revenue from land development to the municipalities, along with the responsibility for the development of local infrastructure.
The municipalities will no longer have to chase after the various government bodies for funds, and will have a strong incentive to promote land development, including high-density projects, as they will become more lucrative from their perspective.
Furthermore, since the value of real estate is closely related to the quality of the local infrastructure, this will create an additional incentive for the municipalities to improve upon them, in order to increase their revenues.
The budgetary cost will not be high, since first, the central government will be divesting development costs, as well as revenue, and second, much of the ensuing development will not take place under current circumstances. If we want to promote high-density residential construction, this is a better way than the VAT waver, which will increase demand, or the “target pricing” plan, which will lead to compromises in quality.
This is no panacea. The municipalities will need to be supervised centrally, and there is state-level infrastructure in dire need of development. For example, if population density is to increase in Gush Dan, a subway is clearly necessary, and it is hard to believe such a project can be funded solely by the relevant municipalities without government involvement (or even with it, for that matter). Beyond that, the periphery must be prioritized in terms of funding; otherwise the lower value of real estate there will translate to lower municipal revenues and lower quality infrastructure, a vicious cycle. However, the bottom line is: will the government be willing, in order to reduce housing prices, to relinquish some control in favor of the municipalities? The author is a Taub Center researcher on the housing issue.