Israel’s Housing Market: The Government Is Doing Everything Wrong

Nobody believes the Housing Ministry when it says prices will drop.

Nimrod Glickman

Two months ago Shlomo Ben Eliahu, the director-general of the Housing Ministry, said something unexpected. He called on contenders for land zoned for 1,725 apartments in Modi’in to take into consideration the government’s housing plans, which involve building thousands more housing units in the city.

Ben Eliahu, it turns out, anticipates that housing prices in Modiin will fall by 20 percent. On Wednesday the bids for the land were opened and it turns out the purchasing groups paid no attention to his suggestion, and competed fiercely over the land, bidding higher than ever for most of the 29 land tenders published by the Israel Lands Administration.

Meanwhile, however, they have been trying to attract new members to the purchasing groups by lowering the price of the apartments to be built, if they win the tenders. In some cases suspicion even arises that certain groups were making false presentations.

In any case the result was that as many as 30 bids were made on certain tenders. Some bidders competed over several lots of land, inevitably driving up the price. In one case, for instance, in September 2013, Zilbermintz & Sons bought a lot zoned for 48 apartments in southern Modi’in for 202,500 shekels ($51,000) per apartment; in the most recent tender it agreed to pay 302,000 per apartment.

Why did the purchasing groups ignore the Housing Ministry’s advice? Because housing in Modi’in is in high demand, explains Tali Cohen, marketing manager at Shapir Residential, adding that their bid, 260,000 shekels per housing unit, assumes that four-room apartments can be sold for 1.5 million shekels.

That compares with prices of 1.2-1.3 million shekels for apartments to be offered under the government’s “target price” housing plans, tenders for which were published this week.

“I’m not worried. I don’t see any connection between the apartments to be built under the ‘target price’ and the apartments we’ll be building based on this tender,” says Cohen, elaborating that the locations are very different.

O ye of little faith

The head of a purchasing group is explicit: They don’t believe the government. That’s why they ignored Ben Eliahu’s warning. Prices in Modi’in may drop some time but certainly not based on the tenders closed on the last day of 2014, he says.

Last week, the Housing Ministry published a “target price” tender in Rosh Ha’ayin and shortly afterwards, in Modi’in as well, Ben Eliahu said on Thursday, adding that builders should be able to sell the housing they build in the projects for the “target price” of 1.2 million shekels for a four-room apartment.

But if anything the tender in Modi’in, together with the collapse of Yair Lapid’s “zero-VAT” plan on low-cost housing, demonstrate that the government’s plans for residential construction have utterly failed, even though the final statistics for the year 2014 aren’t in yet.

This year began with a whimper: Demand for new housing was down compared with the previous year. In March Finance Minister Lapid dropped his “zero-VAT” bomb, which punctured what demand there was. But the decline was artificial, an artifact of would-be homebuyers climbing onto the fence, not a genuine decline in demand for housing. The moment the people realized zero-VAT wasn’t about to happen, the market went back to usual. If the index tracking housing prices had ticked down slightly for a couple of months, in October it shot up by 1.4 percent.

Altogether the housing prices index rose 4.5 percent from the start of the year to October; by year-end it may have risen as much as 6-7 percent, as it did in 2012.

Climbing supply – and prices

It’s hard to count the red alarm lights blinking madly at the government, whose steps regarding the housing market are all wrong. All the parameters scream that it should be doing the opposite of what it is doing. Building starts shrank to 32,850 in the first nine months of 2014, a drop of 7.4 percent compared with the same period of 2013 and down even more from the peak year of 2011, during which 36,000 building starts were posted in the same nine months.

Not much of the 2014 decline is because of Operation Protective Edge; it’s mostly because builders are sitting on an inventory of dwellings. That inventory has been swelling, rising to 27,700 in November – a 14-year peak.

But hasn’t the government been saying there’s a shortfall of housing? Yes it has, but it’s wrong. Not only is there no shortage of dwellings; the supply grew in recent months because of the sluggish demand throughout most of 2014.

Altogether the supply of dwellings rose 15% in 2014, but housing prices did not fall. That’s been the pattern. In 2010, the housing supply increased by 5.5 percent, in 2011 by 37 percent and in 2012-2014 it continued to grow, though at a more modest pace. Throughout, housing prices continued to climb.

Why? One argument is that the overall supply of housing is so short of demand so even the increase in supply we note has no real effect. But in practice, builders built more than buyers bought. So why did housing prices continue to increase even though the supply doubled in the last five years? Why do the ministries continue to claim that Israel is short 100,000 apartments?

We don’t know, but at least some of the price increase may be because people believe the government’s claim that there’s a shortage of housing. Otherwise it’s hard to understand the stampede for the land tenders in Modi’in while the government itself is promising to sell land for thousands more apartments there.

The builders, for their part, aren’t about to increase supply for no obvious reason, which may explain the decline in building permits since the peak year of 2011. In the first half of 2014, only 16,100 permits were issued, reflecting an annual pace of 32,000 apartments. Building permits in 2013 totaled just 34,000, and in 2012 the government issued 37,000 building permits. Most likely, 2015 will be more of the same – at least until the supply of unsold apartments drops.