All That Glitters

Netanyahu Doesn’t Really Want to Lower Housing Prices

He and Lapid could declare a timetable for cutting prices as a national goal. Why don’t they?

It seems like it should be fairly simple: A politician announces that lowering the cost of housing is a national goal, then achieves the goal and guarantees his political future for years to come. So why isn’t the coalition, and Prime Minister Benjamin Netanyahu in particular, doing just that?

Of all the economic problems facing Israelis, housing prices are the No. 1 curse affecting the standard of living of most citizens, except those who own two or more homes. For those who don’t own a home - and for many who do - it's abundantly clear that housing prices are out of reach anywhere an interesting livelihood might be found.

In many cases, home ownership requires such a large mortgage that payments take up a significant chunk of the owners' disposable income. Rising housing prices are a curse for homeowners too. Sure, they can sell the home for a higher price than they paid, but where would they move? When people sell they are often looking to buy a larger or newer home, but the prices for those are climbing too. If the market price for the new home has been rising at roughly the same rate as that of the current one, homeowners will need to beef up their sales proceeds if they want to upgrade. In many cases they will make up the difference by taking out a larger mortgage.

Cross-country comparisons have already shown us that Israel is one the most expensive places in the world in terms of the ratio of housing prices to net income. But that's not all. With the notable exception of global financial centers like New York, London and Hong Kong, housing prices in Israel are also high in absolute terms. It isn’t hard to find a spacious suburban home with a backyard and garage for $500,000 in commuting distance to New York, or other large U.S. or European cities. In Israel, the same amount will get you a three-bedroom apartment in Petah Tikva.

What's more, housing in Israel is built to low standards and the surrounding infrastructure is lousy. Many buildings are ugly or neglected. Public transportation is dreadful and makes commuting difficult. Israel’s per capita gross domestic product approaches those of European countries, but when it comes to housing, many people live in conditions found in much poorer countries.

The constant rise in housing prices increases inequality, serving as yet one more way to enrich one class at the expense of another. After all, typical real estate transactions involve young couples with barely any means forking over payment to people of substantial means. The profits go to landowners, builders, stockholders in the bank that's putting up the mortgage, as well as vendors and importers of home furnishings and, of course, bribe takers in the civil service. At a national level, much of the population is enslaved to a home and its mortgage, laboring for decades to transfer money to people of means.

Despite all this, Netanyahu and his finance minister, Yair Lapid, don’t really want housing prices to go down, even though they probably wouldn’t admit it. That's because it doesn’t fit their economic, political and personal agendas.

Macro figures look good

Netanyahu, whose economic outlook closely resembles that of former Bank of Israel Governor Stanley Fischer, thinks that high real estate prices strengthen the economy. The rising cost of housing inflates the value of land, generates trade and profits for banks and merchants, and increases the amount of tax the state can collect. All of this contributes to an annual increase in the figures for national output, growth and all of Israel’s other macroeconomic indicators, giving people like Netanyahu and Fischer the chance to point out how successfully they’re managing the country. It could also be claimed, perhaps justifiably, that this “success” improves Israel’s global standing in attracting foreign investment and making it possible to receive loans overseas at a lower interest rate.

But just as the average citizen always appears to be doing better on paper than in real life because the rich skew the numbers upward, this tale of macroeconomic growth is a partial and misleading story. Macroeconomic figures are on the rise thanks to inflated numbers and the rich getting richer, even as most people’s standard of living and quality of life is eroding. This can be seen in the country's income distribution as well as the housing market.

The increase in housing prices also suits Netanyahu in the political arena. Israel's rich, whether they are business titans or high-ranking civil servants, are the country’s most powerful lobbyists, and they don't want to see prices drop. Lower prices aren’t good for banks, so the banks will pressure the Netanyahu government to keep them high. Lower prices aren’t good for business moguls who own construction companies or have extensive personal real estate holdings, so they’ll pressure Netanyahu too. A drop in prices would also be worrisome for the regulators, so they'll add to the pressure. And the prime minister doesn’t like being pressured.

Then there is the fear factor, the strongest driving force by far for any politician wary of having to give up the seat of power. That goal would be threatened if the Bank of Israel's dire warnings came true. The central bank frequently warns that if falling housing prices were to coincide with an employment crisis, bank stability would be undermined and the result could be an economic crisis similar to the sub-prime crisis that threw then entire world into recession in 2008.

Warning of a deep freeze

Consultants, whether professional economists or self-designated “experts” operating on their own behalf, warn Netanyahu that if housing prices drop, builders will stop putting up new homes all at once and the real estate industry will enter a deep freeze – with the entire economy following in its wake. Leave it to the income tax officials to tell the prime minister that tax collection will suffer and the treasury’s budget division to explain to him that the deficit will grow. After all, it’s easier to stoke the property tax collection machine that funds the bloated salaries and pension plans in politically powerful organizations. Meanwhile, the capital market supervisors will be talking to him about a financial crisis, a falling stock market, a pension crisis.

The prime minister, like most politicians, hates such risks. Why should he conduct an economic experiment that could end in crisis and possibly end his political career? He’d be better off sticking to the current policy of housing prices consistently climbing, allowing him to present an economic “success story” around the country and the world. In all honesty, if you were in his shoes would you do otherwise?

There’s no reason to panic or to be overly impressed when builders, consultants and other real estate industry operators warn that housing prices will continue rising. They may well believe this, especially if it is a view reflected in their reference group, and they also need to believe it in order to convince themselves, the clients, the banks and the financiers that the good times will continue to roll.

When we take a look at the incentives facing the prime minister and the governing institutions, as well as the banks, the rich and other powerful interest groups, it turns out that none of them has a stake in prices dropping. This is the reality that makes it nearly impossible for the government to genuinely support a drop in housing prices.

But perhaps the considerations of the rich and powerful don’t necessarily have to deprive the public of the rational housing prices, more efficient transportation and higher standard of living it wants and needs. If Netanyahu and Lapid wanted to, they could halt housing prices and maybe even reverse the trend. It’s not such a tall order: All they need to do is put a large amount of land earmarked for new construction on the market and declare a binding national goal of lowering housing prices, say by 10% to 20%, within a fixed time frame. But as of now, they just don’t really want to.

The Good Old Days: Lapid and Netanyahu during the previous government.
Emil Salman