Israel Holds Back Report Faulting Government's Housing Policy

Researchers dispelled myths about the housing crisis and said Zero-VAT and other solutions would fail.

Ofer Vaknin

The Housing and Construction Ministry commissioned several reports by outside consultants over the last two years that challenged conventional wisdom about Israel’s housing crisis and found fault with government policies, TheMarker has learned.

But officials never released the reports, leaving the public and many policy makers in the dark about the extent of the housing shortage and rising prices, as well as who was being most hurt by the crisis and what should be done about it.

In fact, two key policy initiatives the government took in the last year – former Finance Minister Yair Lapid’s plan to exempt many new home buyers from the value-added tax and the Target Price program to sell land to builders at a discount — were dismissed by researchers as too selective and small-scale to stem rising home prices.

The Housing Ministry responded that anyone who wanted access to the main report, crafted by the Ziegelman Institute for Market Research, could apply to receive a copy under the terms of the Freedom of Information Law. The Ziegelman report found that the market for first-time home buyers was divided sharply between haves and have-nots.

Many first-time home buyers, known as young couples in the official jargon, have access to enough capital from their savings and/or their parents to easily put down 50% of the price, the report said. That amounts to 500,000 shekels ($123,700) on average nationwide and about 1 million shekels in the greater Tel Aviv area.

As a result, the Bank of Israel’s efforts to clamp down on mortgage borrowing by raising to 25% the percentage of equity buyers must put up have not reduced demand for mortgages or housing. On the other hand, many young couples can’t put up more than 250,000 shekels for a first home and have very limited prospects of ever buying a home, the Ziegelman Institute found. 

About half of those young couples can put up less than 100,000 shekels, which precludes their buying a home even in the country’s outskirts. The institute estimated that about 50,000 families share their homes with others, mostly young families living with parents because they can’t afford a home.

On the other side of the supply-demand equation, the institute estimated that some 60,000 apartments were being used as offices and 100,000 stood empty all or most of the year — in many cases homes owned by foreigners who use them for vacations.

It said Israel’s aging population was exacerbating the crisis, leaving many older people living in larger homes from the days when they had children while young families were being squeezed into meager space because they couldn't afford more.

One cause for the housing shortage and rising prices is that local authorities prefer commercial development, for which they can charge higher municipal rates, over housing, which makes more demands for municipal services like schools, parks and community centers.

The Bank of Israel has exacerbated the problem by cutting interest rates to record lows, the Ziegelman Institute said. Tax policy has done so as well by taxing people speculating on home sales too little.

The researchers surveyed a raft of people involved in housing policy – government officials, bankers and contractors — and found that many incorrectly discounted the severity of the housing crisis and/or misunderstood who was being stung.

A common assumption was that rising home prices were not a problem because over the long term they were rising 2% annually after inflation. But as the Ziegelman Institute noted, a long-term increase at that pace would spell real price increases of dozens of percentage points.

Many players said the market could absorb rising prices because interest rates were low and parents – thanks to the rising value of their homes – could afford to help their grown children buy homes.

The institute recommend that the government adopt a series of policy measures, some of them new and original, such as reserving 75% of the homes built on land bought from the state for first-time home buyers.

To discourage local authorities from giving preference to commercial development over homes, it suggested that the government force rich authorities to share a higher percentage of the rate they collected on commercial properties with poorer authorities. To discourage property speculation it proposed a ceiling on annual rents for recently purchased properties at 2.5% of the purchase price.