Analysis |

Thanks to the Government, All Signs Point to a Renewed Surge in Housing Prices

When government policy isn’t chaotic, it is increasing demand at a time when supply is falling

Hadar Horesh
High rises going up in Tel Aviv suburb of Beer Yaakov
High rises going up in Tel Aviv suburb of Beer Yaakov Credit: Ofer Vaknin
Hadar Horesh

After four steady months, home prices have started rising again and all the signs suggest that it’s only the beginning.

The Central Bureau of Statistics reported on Tuesday that housing prices edged 0.4% higher in September-October. Although the price of new homes fell 0.6%, that doesn’t represent the real market because they are impacted by subsidized prices under the government’s Mechir L’Mishtaken (Buyer’s Price) program.

Anyone who has been in the market over the last few months can testify that contractors are not lowering prices. Instead, an unusually large development in Beit Shemesh that went on the market caused the average price to fall for the Jerusalem area. But in the 80% of the market that isn’t subsidized, prices have been stable or rising.

Despite the coronavirus crisis and the poor state of the economy, prices are expected to rise in coming months.One reason is that Mechir L’Mishtaken never succeeded in solving the problem of a shortfall in housing supply, only in covering up the rising prices in the free market. The program still accounts for close to 37% of the market for new homes, but in the last year, the government has stopped marketing land at subsidized prices.

The Housing and Construction Ministry last week launched a replacement program to sell apartments at reduced prices, but it is too small to have any effect – at least over the coming year.

In addition, the pace of housing starts have shrunk 10% to 20% over the past year. Many developers have suffered work disruptions and labor shortages while the government has slowed the pace of land sales. The latter is expected to lead to a further drop in starts next year.

The government’s urban renewal programs were supposed to make up for at least some of the decline in land sales, but here, too, development has been proceeding very slowly. Local authorities have struggled to put infrastructure in place for growing populations in old neighborhoods.

On the demand side, investors have begun returning to the market in droves in the final quarter of the year. Moshe Kahlon, the previous finance minister, has sought to drive them out of the market to make more housing supply available to people buying houses to live in by raising the purchase tax. But the current finance minister, Yisrael Katz, this summer brought the tax back to its previous 6% rate.

But that is only one reason for renewed investor interest. The coronavirus has prevented Israelis from flying overseas, thereby deterring them from investing in foreign property while depressing the office real estate market. That’s caused investors to once again look at residential real estate at home.

The Bank of Israel this week took a step that promises to exacerbate the demand by investors by raising the ceiling on the proportion of a mortgage that can be linked to the now very low prime rate of interest. That will enable buyers to take out bigger home loans at no extra cost, but since the market is now a seller’s market, that increased purchasing power will simply lead to higher prices, not easier repayment terms for borrowers.

Government housing policy, which had been centralized under Kahlon, has been dispersed again. Since he was named housing minister eight months ago, Yaakov Litzman has devoted most of his time to political appointments and dismissals rather than dealing with policy.

One controversial program he did propose is to subsidize small, low-priced apartments in the Negev and Galil peripheries. The plan is aimed mainly at young ultra-Orthodox couples, which are part of the United Torah Judaism leader’s constituency. Another proposes to continue Mechir L’Mishtaken on a smaller scale.

In any case, both programs will only increase demand without addressing the issue of increasing supply. A third program to fund urban renewal through land sales may increase supply, but only a few years down the road.

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