The day after - examining Israel's real estate woes

In 1989, some 75% of the population owned the property in which they lived. Today, the number has fallen to 65%.

New housing units for couples in Jerusalem. (photo credit: Courtesy)
New housing units for couples in Jerusalem.
(photo credit: Courtesy)
The past two elections -- the last one a repeat of the first -- cost the taxpayers a pretty penny. Those billions could have been better used to resolve some of the country’s real estate problems.

The general elections are over, and one hopes this means an end to the rhetoric, an end to promises that cannot be fulfilled. The new housing minister will not have an easy task. In these two last elections, the problems of the real estate industry have taken second place. 

The issues debated were political in nature. Economic matters in general and real estate issues in particular were barely touched. I sincerely hope that once in office, the new government and the housing minister in particular will roll up their sleeves and start tackling the problems of the industry, especially the shortage of housing, because this is an escalating problem.

In 1989, some 75% of the population owned the property in which they lived. Today, the number has fallen to 65%. In the past, the number of homeowners in Israel was among the highest in the world. Today, we are slipping fast. The shortage of housing is a potentially explosive social problem. The sooner the government deals with the issue, the better for all.

So how is it that the country which is considered an economic success has got itself into such a mess in an area of such vital social importance?

The problems

1. During the past four years (2015-2019), the housing industry has undergone a slowdown. The 10 years prior to that period was a decade of plenty, at least for homeowners and developers. During 2005-2015, prices doubled. In 2005, the average price of an apartment was NIS 700,000. By 2015, the cost was about NIS 1.4  million. During those 10 years, the number of real estate transactions increased, and the number of buyers purchasing real estate for investment purposes rose. By 2015, they amounted to 30% to 35% of the total.

2. In the past four years, the main influence on the housing market was finance minister Moshe Kahlon, who was in practice a “supra housing minister.” He held in his hands much of the power that had been the prerogative of the housing minister. Kahlon tried to bring down prices by implementing the Buyer’s Price program (Mehir Le’mishtaken). The program was based on subsidizing the price of building land used for the construction of housing for newlyweds and singles above the age of 35. During Kahlon’s tenure, the program was expanded to thousands of new apartments throughout the country. It was not a success. Many of the building projects did not meet their schedules, and a lot of would-be buyers canceled their contracts. In addition, the program that was meant to increase home ownership became lopsided. Many of the buyers were investors who took advantage of the program to invest in real estate on the cheap.

3. The policy of the finance minster brought about the virtual freeze of the free market. It not only resulted in limiting supply but also decreased demand. In normal circumstances, newlyweds and first-time buyers purchased relatively small, inexpensive apartments from homeowners who moved to more expensive dwellings. During the past four years, potential first-time buyers hoped to purchase a Buyer’s Price apartment below market prices and awaited developments.

4. During the past four years, developers slowed their activities; consequently, housing starts fell from a projected annual 80,000 to less than 50,000. This was due to the uncertainties caused by the government’s housing policies and the rising levels of distrust among developers toward these policies.

5. During the past four years, verbal attacks on real estate investors and planned legislation by Kahlon to penalize investors brought about a steep decline in investor purchases of residential real estate. If in 2015 some 35% of residential real estate transactions were motivated by investors, by 2019 the number had fallen to about 13%. Overseas investors, who in the past had constituted a substantial percentage of investors, have all but disappeared.

Suggested solutions

So what to do?

The new government, like previous ones, will want to stabilize prices. The first thing the new housing minister must do is increase housing starts by restoring the confidence of developers, thereby increasing construction.

The new minister should also seriously reexamine the Buyer’s Price program. It was a failure and should be discontinued. Instead, the policy of targeted grants to the underprivileged sector of the community and to certain locations should be reinstated. When introduced in the 1990s, it was much more effective. 

The new minister should woo back investors by canceling the inflated tax on investment in real estate purchases that stands at up to 10%. It would also be helpful if the minister increased the monitoring of large housing construction projects to ensure that they are started and completed on time. The Housing Ministry should also make sure that in tandem with the construction of large new construction projects on the outskirts of existing towns, the authorities should install the necessary infrastructures such as streets, schools and commercial enterprises. Without them, these new areas would become white elephants. No one would want to live in a neighborhood that didn’t have well-constructed streets or adequate commercial and educational facilities.

Furthermore, steps should be taken to promote urban renewal projects by simplifying legislation and removing bottlenecks. Urban renewal projects should be declared national priority projects and be allocated the necessary resources.

I strongly believe that if the new housing minister took these steps, it would go a long way toward balancing the supply and demand needs of housing and thereby stabilize the real estate market.