Government Weighs New Plan to Set Target Prices for Homes

Program being developed would require contractors buying state land to guarantee a top price for a completed home.

The housing and finance ministries and the Israel Lands Authority are working on a new initiative aimed at reining in home prices. In terms of the program that is taking shape, the state, for the first time ever, will sell land designated for thousands of housing units at controlled prices.

The exact terms of the sales, which will be issued under a program called Target Price Tenders, are still being discussed by officials at the relevant ministries.

Source say the emerging plan envisages the ILA publishing tenders for thousands of new homes in several towns by the end of the year. The tenders would not fix prices for all the homes being built, but somewhere between 60% and 80% of them.

The list of communities likely to be the beneficiaries of the program includes Kiryat Gat, which will be home to 7,600 homes in the Target Price program and Rosh Ha'ayin, which will have some 14,000 units. Kiryat Bialik, Modi'in and Beit Shemesh will also be in the program, the sources said.

The Target Price program would replace the current Resident's Price program, which officials have concluded is a failure. The new initiative is important enough for Eugene Kandel, chairman of the National Economic Council, and Harel Locker, director-general of the prime minister’s office, to become involved.

The initiative also represents a sea change in the government’s attitude to the housing market. In the past, it has preferred free market solutions to housing and other industries over more government intervention.

"There's no doubt that we're talking about deep regulation on the part of the government, but we face a deep crisis," ILA Chairman Bentzi Lieberman said. "We have to develop an effective process for lower prices in a situation where the Bank of Israel, by continuing to lower interest rates, isn’t helping."

Rising housing prices have been blamed by some on low lending rates, which have encouraged people to take out mortgages. The central bank has sought to neutralize the effect by creating tougher conditions for the banks to grant home loans, but that has had little impact on demand for housing amid tight supply.

Lieberman hinted at the new initiative's existence last week during a tour of Kiryat Gat. "We need to hit a target of NIS 850,000 for a four-room apartment in Kiryat Gat," he said, adding that the government should have a policy that leads to prices that are 10% to 15% less than the median price in the city today.

The Target Price program will go hand-in-hand with the so-called Umbrella Agreement, which entails marketing huge parcels of land in local authorities, Lieberman said. The first went forward last week in Kiryat Gat "Eventually, together with such large-scale selling, I also want to set a bar on prices, to ensure that an apartment in Rosh Ha'ayin will cost NIS 1 million and one in Kiryat Gat NIS 850,000."

Officials are still divided about how to set ceiling prices, according to Lieberman. At the Housing Ministry, the preference is to set a maximum selling price for completed homes in each new area being tendered. The price would be based on the median cost per square meter of construction, but in any event the final price would have to be lower than the median for the city in which it is being developed.

The Finance Ministry, however, is skeptical about the Housing Ministry's formula, which they assert isn't sensitive enough to the differences in costs for developing wholly new neighborhoods, compared to building in older ones.

Instead, the treasury is purposing a formula that would link the final price to what the contractor winning the tender pays for the land. Contractors would be entitled to an 8% profit margin, as against the 15% that is common today.

Sources say that the two sides should be able to agree on a formula some time before the housing cabinet is next due to meet at the beginning of September. Lieberman said that he hoped the first tender under the Target Price program, for Kiryat Gat, would be in October.

Officials are presenting the Target Price program as an improvement over the failed Resident's Price program. Land designated for 5,000 units has been tendered through the program, but only enough for 1,000 homes has actually be sold.

The new initiative aims to offer terms that are more attractive to contractors. They will not have to commit to selling the homes exclusively to families entitled to special Housing Ministry terms as young couples, rather to the general public, which should make it easier for contractors to market the homes.

In addition, there will be restrictions on the size of homes being built, as typically appears in ILA tenders.

The Umbrella Agreement tenders will also contain terms aimed at attracting contractors, Lieberman said. These include a commitment by the government to finance construction of facilities, such as schools and transportation, for the new neighborhoods. That is aimed at ensuring the facilities have been developed before the first residents move in.

"When a contractor knows that there's infrastructure, public buildings and schools, all being bilt at the same time as the houses themselves, he know the sales process will be much simpler," Lieberman said.