The Riddle No Israeli Government Could Solve: How to Handle the Housing Crisis?

In 2012, Netanyahu's government failed to increase the supply of new units, seen as the key to solving the housing shortage. With fewer building permits being issued so far this year, the downward trend continues.

Arik Mirovsky
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Arik Mirovsky

Housing and Construction Minister Uri Ariel was right in saying "2013 is a lost year," but not in the way he intended it. Ariel was pointing out that even if the government started taking real steps to improve the real estate picture, they wouldn't be felt for another couple of years.

But in fact, the new government getting underway has shown that, despite the change in personnel, its guidelines with respect to housing are identical to those of the previous government. This, along with new taxation about to be imposed, makes it clear that the government really has no idea how to cool down the housing sector.

The cost-of-living protests and Trajtenberg Committee report now seem like a chapter in the history books, and the raw data shows trends continuing on from 2012 which can generally be seen as a market correction from the aftermath of the protests in the second half of 2011. From mid-2011 to January 2012 the housing price index shed 1.6% but has since climbed by 10.6%.

Activity in the housing market also recovered from its decline in the latter half of 2011. The number of home sales averaged 25,500 per quarter between 2009 and midway through 2011, falling to 19,000 in the second half of that year and then bouncing back up to its pre-protest level in 2012 and the first quarter of 2013.

But not everything returned to the way it was before the protests. In 2012 it became apparent that the government failed miserably in fulfilling its goal of increasing the supply of housing, the key seen by both the previous and new governments for solving the housing shortage.

Whereas from 2009 to 2011 builders significantly increased the number of homes built, 2012 saw a 13% drop in housing starts – from 45,735 in 2011 to just 39,780. In the first two months of this year there were only 7,100 housing starts as opposed to 7,600 in the same period of 2012, indicating another annual decline is the offing this year too.

But while those figures are already a reflection of the past, a deeper look shows that 2014 is a lost year too in terms of the volume of construction based on two other indicators: the number of building permits and the extent of land sold to developers by the Israel Lands Authority, formerly the Israel Lands Administration.

According to the latest estimates, 32,300 building permits were issued in 2012, reflecting a 17% drop from the 38,865 permits issued in 2011. This marks the first annual decline since 2004 in the number of building permits. This is cause for worry: Fewer building permits issued means a subsequent decline in housing starts. The downward trend continues to be evident, with the Central Bureau of Statistics reporting the issuance of 1,400 building permits in January and February as opposed to 2,000 in the first two months of 2012 and for the same period in 2011.

The sale of land by the ILA is also waning: In 2012 the government agency authorized the sale of land for 15,380 housing units, a 40% drop from 2011 and also less than in 2009 and 2010. This year might see some improvement due to the sale of land for 4,000 new homes in Harish and 920 in Haifa, but these two large tenders clearly don't indicate a change in the overall trend.

Builders refused to bid on ILA tenders

Dropping land sales point to a reduction in the inventory of land held by developers and serves as a strong indication that 2014 won't be a thriving year for new construction either. But it is interesting to note that the traditional complaint against the ILA not releasing land fast enough doesn't explain the drop in land sales. The reason has actually been the refusal by developers to bid on tenders or offer more than the minimum price.

So what's holding them back? According to a statistics bureau survey on business trends, builders in today's market are bothered by delays in obtaining building permits, shortages of skilled labor, a shortage of readily-available land – some land sold by the ILA can't be developed for a number of years due to various barriers – and difficulties in obtaining bank credit.

Another reason not covered in the survey but often voiced by builders is the public discourse, and hints from the government in particular, that deter them from buying land at as fast a rate as the government would like them to do. But at the same time the government keeps threatening to bring back into force the property tax law, allowing builders a specified length of time to build on their land before being penalized.

Builders can't commit themselves to building on all the land at their disposal because of both the need for financing and market conditions. During a recession, for instance, building starts come to a halt because developers will have a hard time selling homes at a profitable price. In addition, there are places where's it's not worthwhile starting to build during certain periods. Builders don't like the idea of having someone from above force them to build when it isn't in their interest and therefore prefer to avoid amassing parcels of land.

The upshot is that, while the number of home sales has been restored to the level preceding the cost-of-living protests began in the summer of 2011 and prices continue to climb, in March the number of unsold new homes fell 6.7% compared to March 2012, reaching 20,350. According to a statistics bureau survey for the first quarter of 2013, the number of housing units under construction steadily rose from October 2009 to June 2012 and then went into moderate decline beginning last July.

If there is the possibility of a breakthrough, it can be mainly found in the alternative to housing purchases: the development of a rental market. Very little is known about this market apart from the results of quarterly price surveys conducted by the Central Bureau of Statistics. No other government body dealing with housing, including the finance, interior, and housing ministries, has displayed much interest.

But the thinking among decision makers is that some of the steps to be taken for cooling down the housing market need to come from the creation of an organized long-term rental market. The lack of such a market in Israel today pushes many households into buying a home for lack of choice.

The government needs to find ways to encourage financial institutions to invest in such projects. But to do this it needs to convince them that the return will be similar to the returns they see on the same kind of projects they invest in abroad: 8% to 9%. Until now the returns in the local market haven't even approached that level. If they can find the right formula, there will be no doubt that long-term rental housing will be the current government's glad tidings.

New upscale housing under construction in north Tel Aviv. Credit: Nir Keidar
Housing construction in Israel is not keeping pace with demand, and ministers worry that the VAT exemption for first-time buyers will be counterproductive to lowering prices..Credit: AP
Housing cost increases vary greatly around the country.Credit: David Bachar