Unaffordable housing is harming Israel

Israel needs to forgo the high yields it has been realizing on land sales and act on behalf of its citizenry.

Tel Aviv (photo credit: REUTERS)
Tel Aviv
(photo credit: REUTERS)
Although the Israeli government routinely trumpets its impressive aliya figures, emigration statistics are generally kept under wraps. Nevertheless, we know that well over 500,000 Israelis now live in the United States. More than 200,000 of the one million olim from the former Soviet Union no longer reside in Israel. And many experts say these statistics would be much worse if all the Israelis wanting green cards to work in the US could get them.
Who are the Israelis we are losing, and why are they leaving? They are predominantly younger, middle-class Israelis who are fed up with the cost of housing. Their frustration is driving them to abandon their homeland in favor of a land where they can afford a home.
These professionals and business people, whose education credentials and ambition brightened Israel’s future, are immigrating to the US and Canada. Too many countries in Europe, even Germany. And to Russia, the country from which their parents jubilantly fled only a generation ago.
This serious problem that seems to be the “elephant in the room” needs to move front and center among the concerns of Israel’s government leaders, business leaders and the general population.
It deeply troubles me, although I live in Cleveland, Ohio, because I am involved in Israel affairs and I know the issue firsthand. I have had a home in Tel Aviv since 1970, and I have relatives in Israel. Recently, I learned a 26-year-old cousin who lives on a kibbutz is thinking of moving to Los Angeles. Why? Because his brother has a home in LA. This is highly ironic for anyone who knows that LA is one of the most unaffordable cities in America when it comes to real estate, and yet this young man figures his prospects of becoming a homeowner are better in LA than in Israel.
A young couple in my family both graduated from the Technion – Israel Institute of Technology and have excellent jobs, he for Intel and she for a tech start-up. Life would seem to be full of promise for them in Israel, where engineers are in high demand, but they are considering moving to the US so he can continue his career with Intel and they can one day purchase a home. Losing talent like my cousins limits Israel’s ability to establish its own.
What is going wrong? I see the primary reason for the high cost of housing as the Israeli government’s ownership or significant control of at least 90 percent of available land. This has created a near-monopoly that enables the government to realize top dollar for any parcel – a boon for government coffers but a hurdle for real estate developers. In fact, at least 50% of the cost of building a home in Israel is tied to the land cost, whereas the figure in the US is closer to 20%.
These economics drive Israel’s builders to focus only on apartment dwellings they can sell. They do not want longterm investments, and they are not pressing for change. They are quite content with realizing handsome profits every two or three years rather than developing rental apartments.
A secondary root of the problem is all the bureaucracy surrounding real estate development. The long periods involved in obtaining permits, for example, discourage would be developers and stifle competition. The home-building and apartment-building industries need to become true free-market enterprises.
Having studied this problem for a number of years and discussed it with housing experts and several Israeli leaders, I have two highly related suggestions for the government:
1) Invest in the long-term future of Israel by reducing revenues on the sale of land for new housing construction.
2) Lower the cost of land even further if the developer agrees to build rental properties.
These bold but necessary steps may seem illogical. How can sacrificing revenues on the sale of land make Israel stronger? How can increasing rental opportunities ease the home-buying crisis? The answer to the first question is that the country will gain strength, not undermine its strength, if it can demonstrate its commitment to retaining its best and brightest. Short-term losses caused by selling land more reasonably will materialize in long-term gains because Israelis on the verge of leaving the country purely for financial reasons will remain – and many who have left will return – bolstering the economy and tax revenues.
The answer to the second question is that making rents more affordable in a more plentiful, more competitive apartment market will enable renters to find attractive housing while allowing them to save toward owning an apartment or free-standing home in the future.
Although Israel is a young country compared to most other nations of the world, it is mature and thriving in many respects. And yet, in its 68 years the country has produced just one significant building for rental housing that I know of – developed by the late shopping center magnate David Azrieli of Montreal. How can this wholly modern society with its cutting-edge economy have failed to produce a single homegrown developer of affordable rental units?
The answer is simple. The obstacles are far too great to entice anyone into entering the market.
How would the solution work?
As a developer and investor in buildings constructed for apartment rentals, I have many ideas for change – ideas that wiser, better-positioned individuals in Israel can fine-tune. Here are a few:
• It starts at the top. Finance Minister Moshe Kahlon, Housing and Construction Minister Yoav Galant and Knesset Member Roy Folkman are already enthusiastic about creating dramatic changes. Now others, all the way to the prime minister, need to climb aboard.
• The archaic practice of selling land to the highest bidder – which then, for financial reasons, leads only to more highcost homes – needs to end. The government needs to adjust its policies on land use.
• Excessive bureaucracy can no longer be tolerated. Potential investors in real estate development need to know their dollars will be met by fair, efficient practices. A new playing field will then garner interest from developers in the US and other countries.
• Tax credits for developers – an incentive too technical for elaboration here – needs to be considered for private-sector builders. This has been a cornerstone of construction progress in the US and elsewhere.
• Development initiatives, regulations and practices need to be tailored to specific cities and regions. The one-size-fitsall approaches of today are failing the country. How can the housing goals and procedures be the same in Tel Aviv and Lod? • The agreement on the part of developers to build exclusively for renters would include carefully determined, regulated rental levels.
• These agreements with developers might also include clauses permitting renters to eventually buy their units.
• For urban areas in particular, smaller living quarters of 50 to 80 square meters would be included in the mix of new construction. This works well in Manhattan and many other cities, so why not in Tel Aviv? Israel is no longer a poor, fledging country. It has over $95 billion in foreign currency reserves. It is past time for the government to stop acting provincially.
Israel needs to forgo the high yields it has been realizing on land sales and act on behalf of its citizenry. By transforming the approach to housing development and making it easier for real estate developers to turn a profit on rental units, the entire country will profit.
The author is a past chairman of the Jewish Federations of North America and Tel Aviv University, current co-chairman of the Ethiopian National Project and trustee of Sheatufim and Nefesh B’Nefesh.