Even if apartment prices dont drop, it wont be the end of the world, Finance Minister Moshe Kahlon recently declared. This surprising statement comes from someone who promised the Israeli public that he would lower housing prices just as he lowered the prices of cellular communications. Other senior government members also stopped promising that apartment costs would soon drop.
The Israel Builders Association survey checked indices of demand for new apartments compared to the supply. In 2015, around 32,300 new apartments were sold in Israel (not including private construction). This was a record amount of new home sales – 40% more than in 2014 and the largest number of sales since 1999 (when data was first recorded).
By the end of 2015, the number of building starts reached 48,000 apartments, although this number is expected to be updated to 53,000. Approximately 44,400 apartment units were completed that year.
Despite the jump in building starts, the discrepancy between the number of new households and the number of completed apartments highlights the problem of supply, and this is one of the main factors leading to rising prices. The number of households in Israel grew by around 48,000 in 2015, while the number of finished apartments – despite being on the rise – is still insufficient for covering the natural population growth, and certainly isnt capable of reducing the cumulative shortage from past years, which stood at around 133,000 apartments at the end of 2015.
Despite accelerating the rate of land sales, the Israeli government is finding difficult to cope with the obstacles that prevent an increase in housing. The first obstacle is a shortage of professional construction workers in Israel, and the second is the restriction on bank credit that makes it impossible for the banks to finance the growth in construction.
Roni Brick, President of the Israel Builders Association, notes that, the Israeli government is taking action to solve the housing crisis in Israel. More land is being sold in order to expand the housing supply and reduce the gaps between demand and supply. However, in order to enlarge the housing supply, it isnt enough to sell land. The government must ensure that construction companies in Israel have access to enough working hands (professional builders) and credit to finance these projects, and this is where we see a shortage in both parameters. The government had declared its willingness to subsidize residential land through the Mechir LaMishtaken initiative; however, we estimate that the program, which offers cheaper housing only to young couples who dont own an apartment, will not help reduce home prices. To create a real change, we call on the government to accelerate the rate of land sales and to adjust the selection of apartments in the Mechir LaMishtaken program to fit todays actual housing market. The government cant continue to ignore the population of housing upgraders, and the projects in the Mechir LaMishtaken program should include apartments that will be sold to them on the free market. This will strengthen the projects economic base, will increase the banks level of willingness to give contractors financial backing for these projects, and will ensure that the neighborhoods that will be built wont be stigmatized as weak neighborhoods, like those that the government established in the 1950s.
Yossi Avrahami, chairman and owner of the Yossi Avrahami Company, which builds projects all over Israel, also predicts that housing prices wont drop in the next few years: I dont see a reason why the prices of apartments in Israel will drop in the near future. Even though the government has proposed programs to solve the crisis, these are actually just populistic initiatives. The Mechir LaMishtaken program is only relevant for 25% of the housing market – young couples – but what about housing upgraders, who play a major role in the industry? How does the government enable them to buy a new apartment if all the tenders are restricted to young couples? Thats the reason that apartment prices continue to rise and will continue to do so in upcoming years. The solution must include all types of buyers and not just one sector.
Another significant problem that still needs to be solved is the bureaucracy, Avrahami continues. This is a fundamental factor, as bureaucracy costs a lot of money. Entrepreneurs have to run around from one clerk to the next, contending with the ones who woke up on the wrong side of the bed that morning. Yes, it takes a long time to build a house in Israel, especially if you include the cost of hiring foreign workers – which is still very high – as well as the housing taxes and government programs that are no more than a Band Aid for a deep wound.
Yoram Abisror, VP Marketing for Moshe Abisror & Sons, which markets residential projects all over the country – including in Beer Sheva, Ashkelon, Ashdod, Yavne and Rehovot – pointed out that the data that was published prove that the governments efforts arent attaining their goal. Instead of resulting in a drop in housing prices, theyre causing demand to grow both among housing upgraders and among young couples who hadnt previously planned to buy an apartment. In actual fact, the decision to limit land sales to the Mechir LaMishtaken program is causing the supply of large and superior apartments to run out. Many young couples understand that its worth it for them to buy a large apartment now, because otherwise there wont be any apartments left in the future, certainly not at todays prices. Furthermore, there are couples who realize that buying an apartment through Mechir LaMishtaken means that they wont be able to make any changes to the basic specifications that they receive, and therefore they prefer to renounce the Mechir LaMishtaken program and, instead, purchase an apartment in a regular project. In any case, demand for large apartments is growing among housing upgraders as well; they realize that the government wont sell more land for residential projects that suit their needs. Therefore, when there is high demand and low supply, the result is higher prices that will continue to rise as the supply of large apartments is depleted.