Real Estate 2016

Solution to Israel’s Housing Shortage Is Right Here at Home

Finance Ministry is fixed in bringing in more foreign construction workers and companies to speed up construction, but a Technion team urges Israel’s hidebound building industry to go higher tech.

In the early 1990s, a change that now seems nothing short of miraculous occurred in Israel: The average time for building a home dropped from 25 months in 1988 to just 13 in the space of two years. It didn’t happen because Israel brought in foreign construction workers or foreign companies, but because of government policy that brought home to the industry that they needed to make management and technological changes to cope with the flood of immigrants from the Former Soviet Union arriving in Israel.

The experience of the early 1990s should be a lesson to the government, which is desperately trying to bring down housing prices, including by getting more new homes on the market as quickly as possible, says a reports by the Technion – Israel Institute of Technology’s National Building Research Institute, headed by Professor Arnon Bentur.

Right now, the government is focused on shortening the planning and approval process and the Machir L’Mishtaken (target pricing) program that sells state-owned land to contractors at a discount they are supposed to pass on to home buyers. But the government should also be trying to reduce the cost and time it takes to build without harming quality, boost productivity in the construction sector to at least the average level for countries belonging to the Organization for Economic Cooperation and Development, and reducing Israel’s reliance on foreign construction workers.

“The building industry’s current capabilities are so limited that it isn’t capable of starting construction on many more than 40,000 housing units per year,” says the report, an estimate backed up by figures showing that even though home prices are soaring and demand is far ahead of supply, the industry has never been able to exceed 48,000 building starts a year.

For all the treasury’s efforts to cut the red tape in the planning and approval process, the Technion team said, there is an upper limit to how much new construction will result because of the building industry’s limitations. “If the plans to remove the obstacles to building starts succeed, before long we’ll find that the limited resources are overburdened – trying to meet the needs of 60,000 housing units, for example – and splitting their capabilities and energies among more projects, to the dismay of all involved, stretching building times to 35 or 40 months due to the shortage of manpower and other production needs. Attention must be given to reducing construction time.”

Construction time could be reduced by bringing in large numbers of foreign workers, or alternatively by increasing productivity by means of a technological and organizational revolution in the short and medium term that involves applying advanced management and technological methods, the report says.

The more advanced technology companies use, the less need they have for workers. This has been the weak spot for Israel’s construction industry in the last couple of decades. After 1967, Israeli builders came to rely on Palestinian labor and, after the first Intifada, on workers from countries like Romania and China.

The overreliance on low-cost manpower has deterred Israel’s building industry to adopt more sophisticated methods, evidenced by the fact that construction times for homes is not substantially different today than it was in the 1980s. But in the past, like in the late 1980s when the government offered financial incentives to companies that completed projects faster, construction times were shortened.

“The model back then included a mixture of methods. Granted, the first was to import a massive amount of Palestinian manpower, but that was combined with the introduction of new methods for industrializing construction,” says Bentur.

The problem is that it didn’t take long for things to swing back the other way: By 1995, average construction times were back up to 22 months, and since then they have stretched out to the current average of 27 months. “In those days, contractors often worked 24 hours a day – but as soon as the government incentive was gone they returned to their earlier ways,” says Bentur.

The situation changed so quickly that at the start of the following decade, the Zeiler Committee, which examined the public safety issues stemming from the Versailles wedding hall collapse in 2001, wrote that “no one was really in charge” of the construction industry.

The Technion’s report says the government failed to build on the advances it started to make to effect substantial change, but soon reverted to the old policy of relying on cheap manpower. “It didn’t do enough to create conditions that would preserve the improvements in efficiency and productivity – such as creating a multiyear horizon for companies that invest in technology. As a result, the reduction in construction times ended up being a two- to three-year blip.”

The short-term solution, the Technion team says, is to create a framework for five to 10 giant real estate projects of 1,000 to 2,000 units each. The companies that win the tender for these projects would be responsible for everything from planning, to infrastructure to construction. The government would condition awarding the tenders on a building company having the management and engineering capabilities to increase productivity and shorten building times. The team suggests that these giant projects be carried out within the Machir L’Mishtaken program.

At the same time, the committee recommends the government incentivize companies that win these projects, with things like a safety net that ensures the homes that are built are bought. A similar measure was undertaken in the early 1990s, but Bentur stresses that his team does not recommend a return to the same incentives. “At the time they were afraid that if they didn’t build homes quickly enough, tent cities would sprout up in Israel. That’s not the issue today, and so there is no need to take the same sort of measures as then,” he explains. The team does recommend promoting a transition to industrialized building methods, to increase work productivity in the industry, which is currently 40% lower than the average for OECD countries, and to train construction workers.

Over the past several months, the team has met with Finance Minister Moshe Kahlon and Housing and Construction Minister Yoav Galant, and presented to them its main findings and recommendations. Galant subsequently announced that he wished to promote a plan to allocate complexes to large companies for planning and building, as the team recommended, but the plan has not moved forward since then. However, the Finance Ministry is still putting the emphasis on bringing in foreign workers and foreign construction companies.

“The government is very focused, rightly so in its view, on rapid construction by means of importing workers and companies. It’s an easy solution that responds to the political and public pressure. We’re not saying no to that,” says Bentur. “We’re talking about trying to take 10,000 out of the 60,000-70,000 homes they want to build, and building them differently. That’s not a contradiction. We have to ensure that these construction companies have continuity, that they’ll know they have another five or 10 years to continue with this construction method, so they and the workers that use the new methods will see a horizon.”

For the longer term, the team’s report talks about the need to prepare for what conditions will be like in 2048, when Israel ‘s population is projected to reach 12 million, which will make increased productivity and advanced technology even more crucial.