Four Myths About Israel’s Real Estate Market

Are young couples responsible for driving up Israeli home prices? What about foreign Jews or the government?

Dan Keinan

Everyone is talking about young couples and their lack of housing. But what’s a young couple? Is it two people who just got married, and we can forget about how old they are? Or maybe age is the most important thing, not how long they’ve been married?

There are no clear answers, but as to whether “young couples” are suffering from a lack of housing, well, it seems couples themselves are providing the answer. Couples are increasing their purchases of homes, even though former Finance Minister Yair Lapid’s efforts to cancel value-added tax on inexpensive new apartments failed. So it’s not at all clear that high prices are keeping young couples from buying homes.

Yes, this discussion reflects the superficiality of Israel’s housing debate. The issues seem simple, but actually the industry is one of the most complex in the country. It’s influenced by all sorts of things such as planning, law, architecture and transportation, so you can’t just look at it from one angle.

Meanwhile, everyone knows the slogan that the planning and building committees are to blame for the lack of housing, and that the Israel Land Authority is guilty for not supplying enough land. But how can these two allegedly corrupt entities supply planning services and land for the million new immigrants who arrived 20 years ago? It’s definitely possible that the problem is not with these two agencies but with the political and economic leaders above them.

As a result of the superficial discussion, a number of myths have arisen about Israel’s housing industry — and it’s pretty easy to disprove them with a few simple facts, or at least raise serious doubts about their accuracy. The following are four of the biggest myths.

1. We must increase the housing supply for the middle class

One of the government’s main claims is that a major shortage of homes has sent housing prices climbing. It is also claimed that the worst victims of this shortage are the middle class and young couples. But is Israel really suffering a housing shortage?

At the end of the third quarter of 2014, the inventory of unsold new housing units was 27,000, according to the Central Bureau of Statistics. That’s the highest figure since 2000, and the supply of new homes has climbed 83% over the past five years.

It’s not clear the housing market suffers from too high demand or a supply shortage. Even if we assume there is a housing shortage, it’s not at all clear how many units are lacking, or for whom.

When he was finance minister, Lapid spoke about a 150,0000-home shortage, and the Housing Ministry talks about a 100,000-home shortage. The Bank of Israel puts the number much lower, while developers put the number higher. In any case, the question no one can answer is who are the people lacking the homes.

Today there are two main communities suffering from a lack of housing: Israeli Arabs and ultra-Orthodox Jews. It’s no coincidence that these are also the two poorest groups with the highest birthrates. As a result, their problems don’t really affect the housing market for the middle class and young couples.

In most cities, the pace of construction of new homes resembles the pace of the population increase. Only in Arab and ultra-Orthodox neighborhoods, as well as in Tel Aviv, does construction not keep pace. Israelis tend to buy homes near where they grew up. A third of the people live in the same city where they grew up, and many others live pretty close to their families.

Real estate isn’t an abstract concept; you don’t need a magnifying glass to see it. Where there’s a housing shortage it’s visible; for example, people living in shacks in unrecognized Bedouin villages in the Negev, or illegal construction in Jerusalem and the largely ultra-Orthodox city of Bnei Brak. And then of course there are subdivided apartments reaping income for landlords in Tel Aviv.

In comparison, there are plenty of empty homes in Haifa and the center of Tel Aviv suburb Petah Tikva, so there may not be an urgent need to reform the planning, licensing and zoning laws and the Israel Land Authority, or to waste energy on establishing draconian planning and building committees on the national level.

2. Investors are responsible for the price rises

This is one of the favorite claims by the government, the public and even the experts, who love to compare the Israeli real estate market to what happened over the past decade in the United States and Europe, where housing-price bubbles formed — and burst.

The reason for the bubble in the United States was largely the massive push of mortgages onto buyers who couldn’t pay them back. In Western Europe, especially in Spain and Greece, there were great expectations for the entry of foreign buyers and investors who never showed up, at least not in large-enough numbers.

This created huge oversupply that crashed the real estate markets. So there’s no real comparison between those countries and Israel, and the price increases there are not similar to those here.

3. Foreign buyers are driving up prices

Who’s the easiest blame for rising prices? Those who don’t live in Israel yet bought thousands of homes a year at crazy prices. For a while now people have been talking about the role of foreign residents in driving up Israeli housing prices, but the numbers tell a different story.

The peak in purchases by foreigners came in 2005, when they bought 5,414 homes, or about 6% of the total. Foreigners bought homes in specific places such as the center of Jerusalem, Tel Aviv luxury towers, Netanya and Ra’anana north of Tel Aviv, the Ashdod marina on the southern coast and single family homes in Herzliya Pituah north of Tel Aviv. So they mostly influenced prices in those localities.

But in 2006 the number of purchases by foreigners fell to 5,056, and in 2009 to a low of 2,800 because of the global financial crisis. Since then, so it seems, foreigners are no longer so enthusiastic to buy property in Israel — and it could be because of the steep price rises since 2009, as well as these people’s weaker finances in general.

Since 2010 they have bought some 3,000 to 3,500 homes a year — 2% to 3% of the entire market — a figure far from representing a major influence on prices. And this comes at a time when prices rose by a much greater percentage.

Foreign buyers have also changed their purchasing habits and are now buying many more plain-vanilla apartments, not just luxury homes. They also seem to have stopped being suckers, as many were described as eight to 10 years ago. They now do serious research before buying and won’t just pay any price, so it’s a mistake to blame foreigners for rising home prices.

What can be said about foreign buyers is that they have affected the mix of homes planned and built in Israel. Developers, who expected a flood of foreign buyers, built lots of luxury projects not aimed at the locals. Cities were happy to have the luxury homes and encouraged the projects.

As a result, many of the homes offered today are inappropriate for the middle class, leaving many cities with ghost neighborhoods where many units are owned by foreigners who only show up during holiday periods like Passover and the Jewish new year.

4. Lowering land prices will lower home prices

A lot has been said about the link between the developer’s costs and a home’s final price. A number of government plans, including the “target price” tenders, are based on lowering land prices to lower the final price of homes. This leads to the question of whether a relationship exists between price inputs and the price of the product.

In practice, it’s easy to show that a link doesn’t always exist. For example, luxury cars can cost two or three times more than simple models, even though production costs are only dozens of percentage points higher. In various places, such as the new neighborhood in southern Haifa or in the town of Harish in the north, there have been significant cuts in land prices by the government that did not prevent prices from skyrocketing in those places.

A Bank of Israel study has shown that land prices in the country’s outskirts have risen much more slowly than the prices of finished homes — 15% versus 40%. A 2012 report by the Israel Land Authority showed that the prices of land it sold fell in 2011 and 2012 — by 43% in Jerusalem’s Pisgat Ze’ev neighborhood and 38% in Rosh Ha’ayin northeast of Tel Aviv. But the price of homes there didn’t fall at all.

For housing prices to fall, not only must the land prices in land-authority tenders drop, but also the willingness to pay for the homes. Otherwise the value of the land is derived from the price of the home, not the price paid to the land authority in the tender; that is, the value of the land regardless of how much the government gets for it.