The country's construction industry is in a crisis, and ideas for rescuing it are coming from all sides - mostly involving plans that promote construction in outlying areas, which are simultaneously aimed at helping and strengthening those areas. Previous attempts in this vein have shown that the contractors are the big winners, apartment buyers are the main losers, and the real estate market in the periphery declines as soon as such campaigns are over.

The construction industry has been in gradual decline for several years: Contractors have been hit hard, and next year there will be even fewer housing starts and fewer new apartments for sale in the country. For these reasons, the Ministry of Construction and Housing recently presented a proposal to bolster the industry, involving a number of elements: lowering land prices; encouraging banks to finance projects; provision of government commitments to purchase apartments in certain cases, if a contractor is unable to sell them; and increasing subsidies for development. For people willing to buy apartments in outlying areas (not defined in the proposal), incentives include grants, lower interest rates on mortgages and assistance in repaying mortgages.

Sound exciting? Let's go back 7 years. The apartment market in the first half of 2001 was down in the dumps, and demand, especially in the peripheral parts of the country, was almost nonexistent. The housing minister at that time, Natan Sharansky, decided to do something to spur the market there. In June of that year the Sharansky plan was launched. It initially was supposed to last until October and was extended until the end of the year, but with less favorable terms.

The plan divided the periphery into four priority categories, from A through D, and included the towns of Or Akiva, Ariel, Ashdod, Beit Shemesh, Beitar, Givat Ze'ev, Harish, Tiberias, Kochav Yaakov, Carmiel, Migdal Ha'emek, Modi'in Illit, Ma'aleh Adumim, Upper Nazareth, Safed, Kiryat Shmona, Ashkelon, Be'er Sheva, Pisgat Ze'ev and Jerusalem's Har Homa neighborhood. Different incentive packages were offered for each category, including tens of thousands of shekels in grants and 25-year, low-interest loans.

The campaign, which was supported and widely advertised by the Association of Contractors and Builders in Israel, also attracted significant public interest - especially among residents in outlying areas, who felt the government was coming to their aid. Apartment sales in priority area towns rose significantly, and it appeared that a successful method had been found to boost the real estate market in those areas.

Very quickly, however, it turned out that there was also a downside to the incentives. A Bank of Israel report for 2002 examined the effect of the campaign on the construction industry, by comparing the number of three-room apartments purchased in the first and second halves of 2001. The survey found that there was indeed increased demand for apartments in the areas included in the construction drive, and more apartments were purchased. Indeed, there was an 85% increase in apartment sales in the priority areas, and the real estate markets in those places began to gain momentum. The Housing Ministry even reported increased interest in apartments in locales adjacent to those offering the incentives.

In short, the contractors were happily chalking up sales. But what about the buyers? The positive aspects of Sharansky's plan did not extend to them. The Bank of Israel's survey found that the plan was a total failure from their point of view. Although the buyers flocked to the towns where subsidies were being offered, the average prices of the apartments in those locales rose by approximately the same amount as the level of government assistance that was offered. According to the survey's architects, due to the jump in apartment prices, the main beneficiaries of the campaign were the contractors, not the apartment buyers.

How did this happen? An economic analysis of the structure of the Sharansky plan reveals its failure. First, apart from towns with the A (highest priority) status, all the other subsidy packages applied only to apartments purchased from contractors, thus guaranteeing that most of the price hikes would benefit them. Second, the plan was offered for a short time only, such that there was no incentive for contractors to build more apartments in those areas, and only the existing inventory was sold off. The Housing Ministry essentially served as a lobbyist for the contractors, at the expense of the buyers.

Seven years after the Sharansky initiative, we can examine its long-term effects. That plan was followed by the Eitam plan and then the Herzog plan, which were actually smaller scale Sharansky schemes.

Since so many plans were introduced and often extended beyond the original timetables set by the government, the real estate markets in all those "incentive-filled" areas have become dependent on government help. As soon as one plan expired, the markets began to stagnate, in anticipation of another scheme. The price increases that the Bank of Israel found were a temporary and artificial product of government intervention, and not true market growth. Eventually, the apartment prices retreated to their former levels, which only hurt apartment buyers.

Another big failure of those plans, as well as other housing incentives offered to residents not living in the central part of the country, stemmed from the inability of the campaigns to coax residents of the center to move to the periphery and thus spur increased demand for apartments there. In most cases the buyers who took advantage of the incentives offered already lived in or near the towns where the plans were implemented, and thus the basic housing and construction problems were not really solved.

In recent years this situation has changed, and there is no longer any need for grants and government subsidies, because the real estate market is offering even greater incentives to anyone interested in living in the periphery. A new four-room apt in Carmiel, for example, now costs NIS 500,000 - less than half as much as a similar apartment in Petah Tikva. A two-story apartment in Arad costs NIS 700,000, or less than a three-room apartment in Modi'in. A five-room apartment in Nahariya costs NIS 800,000 - about the same as a three-room apartment in Kiryat Hasharon, in Netanya. Even so, there are still no buyers.

Thus incentives for apartment buyers are not the solution, certainly not the only ones, when the price is not the problem.