How Parents Are Pushing Israeli Housing Prices Through the Roof

Finance Minister Moshe Kahlon’s efforts to introduce affordable housing, and parents’ incentives to their offspring to buy an apartment, may have inadvertently driven up the cost of homes in Israel.

Nimrod Glickman

If it were possible to show how Finance Minister Moshe Kahlon has used his time since taking office about a year ago, it would be reasonable to assume that he’s devoted more time to the housing market than any other issue. His prestige and political future are riding on what happens in the housing sector. When he got the finance portfolio, he demanded and received all of the relevant powers to deal with the housing sector – from control over the Israel Land Authority, to responsibility for planning and construction committees and the establishment of a special Finance Ministry housing team (headed by Avigdor Yitzhaki).

The team is working around the clock and doing a lot to remove impediments, lessen bureaucracy, carry out projects through the government’s affordable housing program (called Mehir Lemishtaken) and boost the housing supply. For the time being, however, the market is unimpressed and housing prices have continued to soar – for the eighth consecutive year. And it’s possible that although this wasn’t his intention, Kahlon himself is causing higher demand and prices, more of which anon.

In 2014, house prices went up 4.7%. In 2015, they shot up a further 8%. That’s placing the Finance Ministry under intense pressure to step up efforts to try and halt the trend. The name of the game is a massive increase in supply, to balance supply and demand and address the housing shortage of prior years.

But the housing market is complicated and influenced by a large number of factors. As a result, buyers don’t currently believe that Kahlon or his ministry have the capacity to halt burgeoning housing prices.

Many home buyers look around and discover that if they had purchased a place three, four or five years ago and not waited as previous ministers urged, they would have already made – on paper, at least – several hundred thousand shekels. It’s hard to live with that feeling, especially when many Israelis enjoy the opposite feeling: that they entered the market at the right time, that they made a good investment and didn’t believe what the various finance and housing ministers said.

Low interest rates

The major force that’s fueled the housing market in recent years is low interest rates. Housing prices are based on three core components: the price of land; the cost of construction; and the rate of interest. Since the global financial crisis of 2008, interest rates around the world have been at a sustained low – part of an attempt to stop the world sliding into a recession. Over the years, following the monstrous accumulation of debt by governments, low interest has also become a factor that makes it easier on government budgets.

In Israel, for example, low interest rates have saved the government 20 billion shekels ($5.3 billion) in financing costs in recent years, a Bank of Israel report says. This parameter is still with us and doesn’t look like it’s about to change in the short run. It’s fueling the housing market both because of low mortgage rates and because such low rates mean there’s no point in putting money into savings. Better instead to find investments that offer a higher return. And in Israel recently, the constant rise in housing prices has turned residential real estate into a haven for investors looking for returns. And it’s not just them. It’s also people just looking for a place to live.

Which brings us to Kahlon’s contribution to the increase in housing prices. His point of departure is that housing prices are too high and that the government isn’t providing the necessary supply to allow young couples to buy an apartment. Consequently, he’s doing two things: trying to boost supply in general (he’s succeeding, but not enough); and trying to lower housing prices specifically for young couples through the Mehir Lemishtaken program, in which the government subsidizes the cost of the land.

The program is reminiscent of previous finance and housing ministry programs such as the target price program and the plan to offer value-added tax exemptions on new construction. The government isn’t waiting until there’s a balance of supply and demand to lower prices. Instead, it’s simply giving up a portion of the value of the land (or VAT) and reducing the price under certain conditions and to certain people.

Finance Minister Moshe Kahlon, March 30, 2016.
Ofer Vaknin

That’s all very nice, except that it also increases demand for housing. In its last report, the Bank of Israel insisted that the Mehir Lemishtaken program is not boosting supply and might even boost demand by pushing people who never planned to buy a home to enter the market because they wish to take advantage of a limited-time offer (until next year).

Kahlon’s approach is also reminiscent of the incentives parents give their adult children to enter the housing market. Many parents say, for example, “If you buy an apartment, we’ll help you out.” The offer is conditional. The parents aren’t making the funds available for a vacation in Thailand, just an apartment.

The temptation is great, and the only way for the children to get the money is to buy. So what will they do? They’ll buy, of course. And the larger the amount the parents make available, the less the offspring will be concerned about the price. What do they care if the seller demands another 100,000 shekels if that’s the only way to get 300,000 or 400,000 shekels from their parents?

And Kahlon is acting a bit like those parents. He’s looking out for us, trying to help, subsidizing the price of an apartment and – although it’s not his intent – pushing people into the housing market and inflating prices. And that’s not the only thing he’s doing. At the same time, he’s raising the price of apartments for investors by increasing the purchase tax they pay. He’s also increasing the supply of homes slated to be built in coming years.

But the forces acting against a decline in home prices are significant: low interest rates; Bank of Israel limitations on financing in the real estate sector; obstacles in the fields of transportation, employment and infrastructure in outlying areas that don’t encourage massive construction and don’t encourage a mass shift in the population from the center of the country to these areas. Then there’s the country’s low jobless rate, the purchasing power of home buyers with stable incomes and, above all, the public’s low expectations.

Buyers have already seen a number of previous ministers tell them to hold off from buying. They’ve seen previous plans to flood the market come to naught. Most notably, they’ve seen too many people get rich in recent years by buying residential real estate and ignoring warnings of a real estate bubble.

Kahlon’s task is not only to boost the supply of housing, but also to manage expectations. After eight years of steep increases in housing prices, at the moment that looks even more daunting than increasing supply.

No quick fix

Unfortunately, any major step in the housing market takes years to accomplish. No government program will accomplish the job and reduce prices in a year or two. That means there’s a good chance that even if Kahlon increases the pace at which land is marketed and contractors build quickly, he won’t manage to celebrate the drop in prices during his term in office.

That doesn’t mean dramatic and aggressive steps shouldn’t be taken to address the long-term housing needs in Israel, particularly when it comes to rental accommodation. For now, the government has a company called Dira Lehaskir that is trying to advance rental housing projects – but slowly and at too small an extent. This is a necessary solution to balance the housing market.

The rate of home ownership in Israel, 69%, is among the highest in the Western world. This is seemingly the product of a culture with roots in the Diaspora (involving buying a home for the children) and the absence of a well-ordered housing market – an absence that is pushing people to buy.

The time has come to make a change and create housing solutions that don’t require the purchase of a home and a personal investment of hundreds of thousands of shekels, something only available to the more well-off.