For Housing, 2014 Is Already a Lost Year

The government's efforts to boost housing starts has not only failed but, with fewer building permits being issued, the number will continue to fall.

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 concrete steps to improve the residential real estate picture, they would have no impact for another several years.

In fact, the new government 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 taxes about to be imposed on home-sale transactions, makes it clear that the government really has no idea how to cool the rise in home prices.

The cost-of-living protests in 2011, and the Trajtenberg Committee report that followed, now seem like a chapter from ancient history books. The raw data show that the trend of rising prices, which was briefly interrupted by the protests, was nothing more than a small market correction. 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 a 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.

Not everything has returned to how it was before the protests, though. In 2012, it became apparent that the government failed miserably in fulfilling its goal of increasing the supply of housing - which everyone in both the new and previous governments agree is the only real way to put an end to the housing shortage.

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

While those figures are already a reflection of the past, a deeper look shows that 2014 will be a lost year, too, in terms of the volume of construction based on two other indicators: The first is the number of building permits; the second is 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. The fewer building permits that are issued, the fewer homes will be built.

The downward trend continues to be evident, with the Central Bureau of Statistics reporting that 1,400 building permits were issued in January and February, compared with 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 sales of land zoned for 15,380 housing units - a 40% drop from 2011, and less than in 2009 and 2010. This year might see some improvement due to the planned sale of land for 4,000 new homes in the northern town of Harish and 920 in Haifa. But these two large tenders clearly don't indicate a change in the overall trend.

Declining land sales signal a reduction in the inventory of land held by developers, and serves as a strong indication that 2014 won't be a great year for new construction either. It is interesting to note, though, that the traditional complaint against the ILA - that is does not release 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.

What's holding them back? According to a CBS survey on business trends, builders in today's market are troubled 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. At the same time, the government keeps threatening to bring back 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 typically come to a halt, because developers have a hard time selling homes profitably. In addition, there are places where's it's not worthwhile building during certain periods. Builders don't like the idea of having someone from above forcing them to build when it isn't in their interest and, therefore, prefer to avoid amassing parcels of land.

Prices climbing

The upshot is that, while home sales have been restored to the level preceding the cost-of-living protests 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, beginning last July, went into moderate decline.

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

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. 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.

Yuval Tebol