Analysis / Not Everyone in Israel Wants Housing Prices to Fall

Incoming Finance Minister Moshe Kahlon has staked his career on reducing property prices. He will face a surprisingly large number of enemies.

Reuters

In Israel, as in any other country, it is difficult to carry out reforms or significant changes to the economy. The reason, as any economist who has studied the issue will tell you, is vested interests. In any given situation, regardless of how it developed, there are groups benefiting from the way things stand and bestowing them with quick and safe profits. Thus, they have no interest in changing anything.

Those with vested interests will always fight any proposed change. If they have any political, public or media clout, they will successfully block it. For anyone profiting from an existing situation, the argument that they would also do well under new circumstances is not a persuasive one. Anyone enjoying profits in the present is unwilling to exchange certain gains for a future in which one may or may not make similar gains.

In Israel, interest groups that benefit from things as they stand usually manage to weaken, torpedo or block any initiative or proposal for change. In a study conducted by Prof. Avi Ben-Bassat and Prof. Momi Dahan at the Israel Democracy Institute, they found that the average time it takes for implementing financial reform is 10 years. To create such an “achievement” [in delay tactics], interested parties have a toolbox filled with various methods: lobbyists who confront politicians; pressure exerted on senior government officials; threatening the professional future of regulators who go along with proposed reforms; recruiting the media; and, chiefly, scaremongering.

Yes, fear is a crucial tool. In many cases, all that the players with vested interests need to do in order to torpedo a proposed reform is to sow doubt in the minds of decision-making politicians, letting them know that if the reform falters – and they’ll do everything they can to make it fail – they will see to it that this failure is attached to the reputation of these politicians, thus ruining their careers.

This is obviously a serious flaw in Israel’s democratic system, since most proposals for reform are intended to improve conditions for the general public, and they are shot down purely so as to perpetuate the profits of tycoons and small interest groups. All this occurs because the public doesn’t understand how the system really operates.

What’s needed for a reform?

In the case of high property prices, which have sidelined and ejected thousands of young and not-so-young couples from the housing market, it’s not hard to identify the interest groups that are trying to shoot down the housing reforms planned by incoming Finance Minister Moshe Kahlon (Kulanu). It’s very simple: Anyone who owns abundant real estate, anyone who finances such people, or anyone making a living off, or servicing, real estate investors is not in favor of a reform.

The list is long: Contractors who own land or apartments under construction; banks and financial institutions – the ones that give loans to contractors and mortgages to the public; families with more than one residential property, and certainly those people with three or more properties ... all these are against a fall in housing prices. This obviously includes politicians, senior officials, people with clout, groups such as powerful workers’ committees, and those insiders who purchased apartments as investments while taking advantage of special offers. Some members of the media are also against slashing housing costs.

The state also faces a conflict of interest when it comes to the reform that Kahlon envisages. A reduction in housing prices will reduce tax revenues and lead to reduced activity in the entire real estate market, with a drop in revenues from real estate sales and granting of leasing rights. There are multiple, powerful, rich and influential forces at play.

Thus, in order to implement a reform or significant socioeconomic change such as slashing housing prices – in spite of all these opposing factors – economists will tell you that at least three conditions need to be met: a crisis; political will; and media support.

A crisis is already upon us. The high cost of housing is a near-existential crisis for those without apartments. Israel holds the record for the number of monthly salaries required to purchase the average apartment. The insane housing prices force the cost of living to spike and don’t enable Israelis to set aside funds as savings toward a pension. They elicit tension and anxiety, and make people just as miserable as thinking about the Iranian bomb does.

One of the more frustrating experiences an Israeli can have is to travel the world – especially the affluent Western one – and see what luxurious properties one can obtain for the price of a miserable two-room apartment in Tel Aviv (excepting select locations such as Manhattan or London).

What does your average Israeli family with one apartment feel? Confused, mainly. Anyone who has purchased an apartment in the last two years, taking out a big mortgage, doesn’t want to hear of reduced housing costs. Such people would take a big hit if it happens, as well as being labeled suckers.

People who purchased an apartment many years ago and are now approaching 50 have mixed feelings, also: on the one hand, they don’t want the price of their property to fall. But on the other, they’re already thinking of how their children will purchase an apartment, where and at what price. Based on cold calculations, they won’t sell their own apartment anyway – thus, anyone owning only one apartment should favor a drop in housing prices.

Where are the politicians?

The second factor required for implementing reforms is political will. Ostensibly, the will has been here for several years – at least since the social protests of 2011, which focused on housing. At the time, Prime Minister Benjamin Netanyahu announced the creation of new planning committees, which would accelerate construction and reduce prices. As is widely known, this didn’t happen.

Two years later, Yair Lapid (Yesh Atid) came to the treasury, promising to help young people with his idea of zero-rate value-added tax for select apartments. Politicians of all stripes promised voters they would slash housing prices. Did they mean it, or were they only making empty promises without ever expecting to deliver? Netanyahu owns his own real estate and has friends with multiple properties – there is no reason to believe he is interested in diminishing their value. Housing doesn’t interest him, and the only reason he addresses it is public pressure.

Former Finance Minister Lapid is also close to people with multiple and expensive real estate holdings. Anyone paying close attention to his speeches and interviews could note that he never promised to work toward reduced housing costs, only to assist young people in buying their apartments for less money (for example, through VAT exemption).

The same goes for other politicians. Many of them own apartments in addition to the ones they live in. In all honesty, if you were in their place, how far would you go in order to reduce prices?

Kahlon, in contrast, undoubtedly has a fierce political desire to bring prices down. He based his election campaign on this, and he focused his coalition negotiations on obtaining the tools and means for achieving this goal. His entire reputation and political future are now linked closely to real estate prices. He has completely locked himself in. After getting the treasury, the Housing and Construction Ministry and the Planning Authority, any failure, in which prices continue to rise, will rattle his career – no one will remember his prior achievements in the cellphone market. Less clear is the position of other cabinet members and MKs.

What’s the media’s problem?

The third important requirement for any reform to succeed, especially one with so many opponents, is support – or, at least, the absence of opposition – by the press and other media. Why is this so? In the face of political risks and the pressure of interest groups favoring the continued rise in prices, only massive public pressure can make politicians act. This pressure depends on what the public hears and knows through different media sources.

And here comes the big surprise. In recent weeks, many newspapers and other media have highlighted news and views that oppose Kahlon’s plan to reduce housing prices. How could this be? According to what the public believes, the media supposedly reflects the opinions of its readers and viewers, so it should be supportive of such a campaign. But this isn’t the case. Some newspapers are searching for flaws in Kahlon’s proposals, highlighting the risks and warning of crises, difficulties, bankruptcies and layoffs. Isn’t this strange? Do some of the media reflect, in fact, the positions of vested interest groups that oppose price reductions, joining the campaign to torpedo Kahlon’s efforts?

After surveying a selection of newspapers and other media in recent weeks, there is no alternative but to conclude that the answer to these questions is affirmative. Newspapers that are connected to tycoons – directly or indirectly – are working to make it difficult for Kahlon, delegitimizing his proposals and sowing doubts among politicians.

Maybe this shouldn’t come as a surprise, but after Kahlon’s appointment as finance minister and his focus on housing, it is yet again becoming clear that under normal circumstances, the media appears to reflect public interests. But when it comes to reforms or legislation that threatens powerful interest groups, those same newspapers side with the powerful.

Even though this is not surprising – since it happens every time big reforms are discussed – the public shouldn’t just roll over and accept it. Undoubtedly, Kahlon wants to reduce prices, and without doubt this is what the public wants and needs. A moderate and controlled reduction in housing prices will benefit the vast majority of citizens.

Kahlon’s program may not be perfect, there may be better ideas, and the whole plan may prove hard to implement. Still, rising housing prices are the nastiest way of creating inequality and societal disparities – by increasing the property value of the haves, in contrast to the heavy debt burden or hefty rental costs imposed on the have-nots. The public doesn’t have to accept a media that works against its interests in support of the rich and powerful.

On the basis of past large-scale economic reforms, here is a forecast: In the coming weeks and months, you’ll continue to read more and more stories of the problems and risks associated with reduced housing prices as proposed by Kahlon. These items won’t be intended for the wider public, which has no influence in any case. They’ll be targeting politicians so that they bury or neuter any reform.