The housing situation in Israel

A panel of experts was gathered to discuss the current state of the real estate market the day after Trajtenberg recommendations were submitted.

Panel of experts 311 (photo credit: Nimrod Saunders)
Panel of experts 311
(photo credit: Nimrod Saunders)
The real estate industry in Israel is going through a period of change. The government is intent on bringing prices down. It is increasing the sale of government land for building purposes, but prices are staying put. In addition, there is social unrest, demonstrations, tent encampments, etc.
Real Estate held a panel discussion on the current state of the real estate market. The panel was held in the board room of the Association of Contractors and Builders in Israel. It just so happened that it was held the day after Prof. Manuel Trajtenberg submitted the recommendations of the committee he chaired and the Finance Ministry published its July summary on the real estate industry.
The Trajtenberg recommendations contain an important chapter on the real estate industry and ways to bring down prices or at least to alleviate the current hardships. The summary of the Finance Ministry shows that the real estate market is cooling substantially.
The following panel of experts was gathered to discuss the current state of the real estate market:
Eyal Gilad, CEO Gilad & Anat Construction and Development Adina Hacham, general manager Anglo- Saxon Real Estate Moti Kidor, general manager Association of Contractors and Builders in Israel Dannus Ohad, chairman Real Estate Appraisers Association Roy Segev, vice-president Yad 2 Moderator: John Benzaquen, The Jerusalem Post
Moderator: The figures published by the Finance Ministry show that the real estate industry is moving towards a recession. Do the figures of the Association of Contractors and Builders correspond?
Moti Kidor: The figures published by the Finance Ministry are for one month only. The state of the real estate industry and market cannot be judged by what is happening in one single month. Furthermore, the government does not publish one single set of figures for the real estate industry but many. Besides the Finance Ministry figures, the chief appraiser, an official of the Justice Ministry, publishes his own set of figures. The Statistics Bureau does the same, and the Housing Ministry also has its own set of figures. As you well know, the figures differ.
But I must say that in the past months demand for real estate has slowed down considerably. Since the beginning of the year and even before that, senior government ministers have been giving the impression that prices will fall in the very near future. Furthermore, the Housing Ministry through the Israel Lands Authority has been increasing the amount of land sold to developers,and the policy of the Bank of Israel has made mortgages more expensive and more difficult to obtain. On top of this, we have the social unrest which has increased the expectations for a fall in prices.
Under these circumstances, prospective customers prefer to wait it out. After all, why buy today if prices will be lower tomorrow?
Adina Hacham: The figures published by the Finance Ministry are for July.
Our figures show that demand had been falling even before that. But this is understandable. I agree with Moti Kidor that everything that is happening, especially the current social unrest, has had a very negative effect on the real estate industry, and potential buyers are awaiting developments. Consequently, demand is very weak and has been so since July.
I have the impression that things will improve after the High Holidays. After all, some 40,000 new households are formed every year, and they have to live somewhere.
I want to point out that despite the fact that demand is weak, prices are steady. This proves that we are going through a temporary period of canned demand. The demand is waiting in the wings for better times.
Moti Kidor: From studying the Finance Ministry’s figures, one sees different parts of the country. Investor demand has slumped in the center; but in Beersheba, for example, it is still very evident.
With regard to prices not falling despite the fall in demand, they are not falling because they cannot fall. Prices rose during the past three years because demand outstripped supply. During the past 10 years, annual housing starts and housing completions have fallen below the number of annual household formations. Consequently, there is an accumulated shortage of approximately 100,000 dwellings. In such an environment, prices cannot fall.
Moderator: If as you say there is a shortage of 100,000 dwellings, there should be 100,000 homeless families.
Moti Kidor: They live in rented accommodation
■ Moderator: But if they rent housing, it means there is no shortage of 100,000 residential units. These families don’t own their homes, but there is enough accommodation to house the population?
Moti Kidor: Rentals solve part of the problem, but many young families live with their parents or families. There are not enough dwellings to supply the needs of the population.
Moderator: Mr Gilad, you are a developer with a large building project underway. Are you experiencing difficulties in marketing your project?
 Eyal Gilad: Demand has been falling dramatically since the beginning of the year, and it is very marked at these times. Nevertheless, prices are steady. They are not falling because demand is temporarily depressed, which means we expect it to rise anew.
But even if that were not so, I do not see prices falling because building costs are rising all the time. The price of land is increasing, the shortage of labor increases, labor costs, etc. The shortage of labor is lengthening the time it takes to complete a building project. It should take 24 months, but it is taking 30 to 36 months to complete. That is why building completions are lagging behind building starts.
I want to point out that the real estate industry, like all industries in a free market environment, has its ups and downs. A developer must take that into consideration. He must make sure of the necessary financial resources for the bad times.
Moderator: Can the developers survive a fall in prices? Has the Association of Contractors and Builders taken this into consideration?
Moti Kidor: We have not because all signs indicate that prices in the near future will not fall, so we see no reason to go into hypothetical situations. But I agree with Eyal Gilad. Every businessman, not only a developer, should be prepared for the good as well bad times.
Ohad Dannus: Developers and the Israel Lands Authority do not expect prices to fall in the foreseeable future. In consequence, the authority is constantly increasing the price of land, and the developers are increasing their bids to be able to acquire the land that will keep them in business. The higher price of land is ultimately borne by the consumer. The price of land alone prevents any falls in the price of real estate in the foreseeable future.
But there are other reasons that prevent a fall in prices. By the end of the year there will be an additional shortage of 10,000 apartments because housing completions will probably fall below 30,000 in contrast to the 40,000 new households being formed. Secondly, if prices were to fall in the future, housing starts would tumble because developers would slow down their building projects, and this is contrary to what the government wants to achieve.
I want to correct a misconception that the number of families who own their home is over 80 percent. It is closer to 65%. Many who cannot afford to buy an apartment rent one.
Roy Segev: Yad 2 is a website which, among things, advertises real estate for sale. We have come to the conclusion after analyzing the current trends that the market is frozen. Transactions are few, and it takes a long time to finalize transactions.
From the trend on our website, we cannot see if prices are going up or down. We can see the level of supply and demand and the length of time of ads on houses for sale. Buyers are waiting to see how things develop. Up to now they were waiting for the Trajtenberg recommendations. Now they are waiting to see how they will be implemented.
Moderator: Will the Trajtenberg recommendations have an influence on real estate prices? After all, it was the price of real estate and the high level of rentals that started the current social unrest.
Moti Kidor: With regard to housing, the committee headed by Prof. Trajtenberg recommended increasing supply by, among other things, rebuilding dilapidated areas or apartment buildings and increasing the number of new units in the given area by increasing the supply of land and by encouraging building projects for rental purposes.
I don’t believe that these recommendations will solve the problem. They’re not holistic. They don’t take into consideration two major stumbling blocks - the shortage of skilled workers and the new regulations with regard to mortgages and loans to developers. If these two problems are not solved, housing starts and especially housing completions will fall in 2012 and prices will rise.
The industry needs 57,000 skilled workers to be able to construct 40,000 units a year. At present we have much less. In the 1990s we built 70,000 apartments a year and we had 83,000 foreign workers. Now we have only 8,000 foreign workers. We have 20,000 Palestinian workers and 17,000 local workers, and that is not enough.
Moderator: What about the financing problem? Mr. Gilad, as a developer, why do yo have problems with the new regulations?
Eyal Gilad: The problem is simple. There is less financing. Mortgages are smaller because the Bank of Israel’s new regulations limit the amount of mortgage as a percentage of the cost of the property. Furthermore, developers need to invest 30% of their own funds in contrast to 20% up to now.
If buyers can get fewer mortgages, it means they have less money to buy an apartment. And if developers get less money from the bank, it means they have limited financial means and they build less. Moti is right. Under these circumstances, we will be building less not more.
Ohad Dannus: Some of the recommendations may have a long-term effect. They have changed the terms of the land tenders (of the Israel Lands Authority) from that of selling to the highest bidder to selling to the one who offers the lowest prices for the apartment to be built on the land.
I also believe that pinui binui - tearing down dilapidated buildings and putting up modern ones with three times the number of apartments - is the only way to increase supply in the large cities.
Adina Hacham: Pinui binui can solve the problems of limited supply in the large cities. I want to point out that because of the high cost of housing in the central cities, potential customers are drifting to more peripheral areas. Prices in these areas are rising. If we want to bring down prices in the peripheral areas, we first have to bring them down in the center because prices in say Rehovot or Modi’in are influenced by prices in Tel Aviv and Jerusalem.
Moderator: I believe there is a clause about affordable housing and the government’s building apartment buildings and renting them out at subsidized rates.
Roy Segev: Affordable housing for whom? The current social unrest started because of the very high cost for the middle classes. Their monthly incomes range from NIS 10,000 to NIS 15,000. It is they who cannot make ends meet. It is they who cannot afford to buy an apartment or pay the high monthly rents in the market. It is for them that affordable housing must be made available. It is for them that we need to build apartments for rent.
Moderator: Given the building costs, can developers make a profit? What is the current rent for a three- or four-room apartment in the center of the country? And what is an acceptable return on such an investment?
Adina Hacham: Renting in an acceptable area would cost NIS 5,000 to NIS 6,000 a month for a three-room apartment and NIS 7,000 to NIS 8,000 for a four-room apartment.
Eyal Gilad: An acceptable annual return on the investment would be from 6.5% to 7%
Moti Kidor: To be economically feasible, there must be a package that includes tax benefits and subsidized land.
Moderator: What developments can be expected in 2012?
Eyal Gilad: Prices will remain more or less unchanged in the central regions but in the more peripheral area I expect prices to rise somewhat.
Adina Hacham: Demand will increase anew. Not like in 2010, but it will increase because people need a roof over their heads. I believe that prices in general will rise by 5% to 10% during all 2012.
Roy Segev: If demand for real estate does not recover, prices in 2012 will fall slightly.
Ohad Dannus: I don’t see any substantial changes at all.
Moti Kidor: There is no alternative to a home. Demand will recover, and I believe we will see a rise of around 6% in prices during 2012.