Rothschild Boulevard protests - Moti Milrod - July 2011
Middle-class people protesting on Rothschild Blvd. yesterday. Photo by Moti Milrod
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Something leaps to the eye when you visit the tent-dwellers on Rothschild Boulevard in Tel Aviv who are protesting the increase in housing prices. They are not members of some "weaker echelons of society." They aren't jobless. They aren't from the periphery. They aren't Arabs, ultra-Orthodox or foreign workers. They may be in tents for the moment, but they aren't even particularly pitiable. Most have jobs. They earn a salary.

In the early morning, before the politicians began to arrive, the tent enclave was quiet, because many of its residents had gone to work. In fact, the people in the tents are very north Tel Aviv - or, in a word, they're middle-class. They have degrees. They have jobs. What they don't have is a home to call their own.

But if these people don't have homes, then who lives in all those apartments in the city? Or, to put it in economic argot: Who crowded these people with schooling, professions and willingness to work hard out of the Tel Aviv market?

Crowding out is a familiar term to students of economics. It is used in two contexts. In the context of macroeconomics, crowding out could refer to the government acting in a way that forces the private sector out of a given market through tweaking interest rates, for instance.

It is the second context that's of interest in this case: When a group of consumers or suppliers is crowded out of the market for a given product, for instance when there is asymmetry in access to information about product quality. In that case, somebody without that information quickly finds himself crowded out of the game.

So, who crowded out the middle class from Tel Aviv's housing market? The answer: Foreign investors. Rich Jews and Israelis. They are the ones who crowded out the middle class because of extreme asymmetry in terms of taxation, living and civic duties.

Tel Aviv housing prices have risen more than anywhere else in Israel during the last three years. It is because of nonresidents, almost all of them Jews, buying housing, for their annual visit to Israel, as an emotional investment in the Holy Land, or as insurance against the possibility that they can't continue living abroad. Other apartments were snapped up by rich Israelis, buying them for investment, intending to give them to the kids one day.

How many apartments are we talking about? Statistics from 2010 show that a third of the apartments that changed hands in Israel that year were for investment purposes - not for the buyer to live in. Clearly in Tel Aviv that applied to more than a third of homes sold in 2010. We can say that about 50% of the dwellings in Tel Aviv were bought by rich people from abroad, causing prices to spiral upward.

Here is where the asymmetry in the market conditions becomes extreme. Not only are the nonresidents richer than the residents of Tel Aviv; they also get blanket reprieves from tax and don't have to fulfill civic duties that local homebuyers must fulfill.

The Israeli middle-class person spends three years in the army during which he doesn't get real pay. He has to pay tuition at university or college. When he starts to work, he faces a slew of taxes, including income tax, National Insurance (social security ), healthcare tax and a host of indirect taxes. The Israeli also pays among the highest prices in the world for food, communications and other staples.

The conditions for nonresidents are otherwise. They earn money in euros or pounds; tax abroad tends to be lower than in Israel, too. Here, the nonresident pays no tax at all, not capital gains tax, not sales tax or Customs. The richer he is, the lower the proportion of his income is paid in tax. And naturally he doesn't serve in the Israeli army, or serve in reserves, and if he's European he doesn't have to pay university tuition for his children. It's free there.

Is it any wonder that Israelis are crowded out? There aren't many countries in the world, if any at all, so eager to load the dice in favor of foreign investors at the expense of the local population. Many countries restrict property purchases by nonresidents, or have large programs to help the poor afford homes.

At the end of the day, the problem isn't housing prices in Tel Aviv. Demand dictates higher home prices in every successful metropolitan hub.

The real problem is the inability of Israelis to meet these prices, however talented, learned or hard-working they may be. In other words, in a city where rich nonresident investors dictate prices that would befit a European capital, one can't rent or buy a home with Israeli disposable capital.

The talk about fresh building and expanding the supply of housing in Tel Aviv is empty. Most of the land doesn't belong to the state any longer anyway, and contractors won't take a penny off "market value." The solution is to break, or at least reduce, the asymmetry between nonresidents and locals by imposing tax and restrictions on the former and helping the latter. Gone are the days when one has to promise a villa and a Volvo to foreign investors just to entice them to come and invest here. It's time to give the benefits to the people born here, who served in the army here.