Israeli Finance Minister's Plan to Bring Down Home Prices Unlikely to Achieve Its Goals

Finance Minister Moshe Kahlon’s ambitious plans to bring down the cost of housing in Israel may achieve its goals, but most likely only in the Negev and Galilee, far from the greater Tel Aviv area where most Israelis live and want to live.

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That is one of the key conclusions of an analysis of housing trends in 16 Israeli cities conducted by TheMarker, which will be published in full later this week. It found that Kahlon’s flagship program – Machir L’Mishtaken, or Target Pricing – is likely to spur home construction in the periphery and quite possibly deter builders from starting projects in the center of the country.

Kahlon, who built his reputation as a fighter for lowering the standard of living, faces an immense challenge in the housing market, where prices rose 7.8% in 2015 alone. Creating supply to reduce prices takes time, low mortgage rates encourage buyers and previous government attempts to grapple with the issue flopped, leaving buyers skeptical about the finance minister’s current efforts.

Kahlon’s Target Pricing program, which offers builders state-owned land at discounted prices on condition they pass along the savings to home buyers, got under way last year. It took a major step forward on Tuesday, when two builders won auctions conducted by the Israel Lands Authority for land zoned for 488 housing units in Rosh Ha’ayin, a Tel Aviv suburb.

An examination of the bids shows that the builders – the first a joint venture between Ortam Sahar and Gindi Holdings and the second the Denya Cebus unit of Africa Israel Investments – committed to building apartments of 80 square meters for 857,000 shekels ($228,000) and units of 120 square meters for up to 1.24 million shekels.

However, auctions for land in Dimona, a development town deep in the Negev region, drew only a single bidder for land zoned for 24 homes.

Target Pricing in the periphery is likely to boost the stock of housing in areas of Israel suffering from out-migration and tepid demand, forcing prices lower. A key example is the northern town of Afula, where the first Target Pricing program was conducted.

Between 2008 and 2014, Afula’s population grew by 4,000 but its housing stock grew by 1,700 – far more than was needed to meet the increased population. Under the Target Pricing program, more than 1,500 units will be added to the stock. A town of about 45,000 people, Afula will have the third-largest number of new homes under construction in Israel after Jerusalem and Tel Aviv.

Similar numbers apply to other towns in the periphery, like Carmiel and the Krayot suburbs of Haifa.

In the center of Israel, however, Target Pricing is unlikely to be on a scale large enough to have an effect on the housing supply – and, in fact, might cause prices to rise. The ILA’s almost exclusive focus on selling land through the program means that little is being auctioned in the center of country, reducing the supply of properties for development and inevitably causing prices to rise.

In a study published last month, the Bank of Israel warned that Target Pricing wouldn’t bring down housing prices. It said that it would only directly affect 15% of the 100,000 real estate sales done on average every year. First-time buyers, at whom the program is directed, account for 40% of all home purchases in any given year.

The supply-demand imbalance that Target Pricing faces was evidenced in the lotteries for homes being conducted in the program, where 20-30 families have entered for every home being offered.

In any event, Target Pricing is unlikely to have an effect on home prices nationwide in the coming year, because it is just getting started. If it does have an impact it will be in the following years.