Rent Is Not a Four-letter Word

Owning your own home isn’t the be-all and end-all of life: There are times when it may be preferable to rent. Here are five myths about the Israeli rental property market, debunked

Rotem Shtarkman
Rotem Shtarkman
A Tel Aviv apartment building. Housing prices rose around 10% in 2013.
A Tel Aviv apartment building. Housing prices rose around 10% in 2013.Credit: Tomer Appelbaum
Rotem Shtarkman
Rotem Shtarkman

Last month, Finance Minister Yair Lapid advised young couples not to buy a home this year because “prices will be going down.” But like all his other promises, it’s impossible to know if this one will be fulfilled.

What is clear is that in Israel, the image of rental living is viewed – somewhat unjustifiably – in a negative light, tying into a national discourse on real estate that’s fraught with slogans, clichés, financial misunderstanding and faulty information. Here are five common myths about renting.

1. “Paying rent means throwing
money down the drain. You could 
pay the same amount on a mortgage 
and end up owning property.”

Rent could be said to represent just the return – meaning the interest – on the asset, not the principal. Therefore, comparing rent to mortgage payments should take only the interest component into account. Fundamentally, there is no difference between rental and mortgage payments: The mortgage is simply higher, since it includes principal along with the interest. If you live in your own non-mortgaged home, you’re also theoretically paying rent to yourself, because had you not been living there, it could have been rented out to others.

For decades, rental homes in Israel generated low returns compared to other investments bearing similar levels of risk. From this perspective, anyone owning a home lost out. But since home prices rose sharply over the past decade, homeowners have come out ahead while tenants have lost out.

Hundreds of thousands of Israelis benefited. This must be a source of irritation to anyone who didn’t buy a home, and rightly so. But any comparison of rent to mortgage could prove false, since people who rent usually live in more expensive homes than they could afford to buy. In this sense, renting allows people to live in places they couldn’t have, had they needed to buy – not because of the price, but due to a lack of capital.

None of this tells us if it’s better to buy a home now rather than renting. Lapid might be correct in saying that it’s better to wait.

2. “The rental market is a jungle 
and landlords are pigs.”

Landlords aren’t aliens, nor are they villains or tycoons. All things considered, they’re just people who own property and are trying to make the most of it. It’s their right to ask the market price. Sometimes they themselves are living in a rented home, and need to rent out their own property. It may be a joint inheritance, or merely a means of saving for retirement.

What drew many into the market in recent years were low interest rates, tax breaks and perhaps the belief that property prices will keep climbing. Until now it’s worked – but that tells us nothing about the future.

The home rental market is actually a relatively free and efficient market, not a jungle. Is Tel Aviv’s Carmel Market a jungle? Are toy stores a jungle? What about restaurants or bed-and-breakfasts? Prices in the rental market are determined by supply and demand. They are well-known and consistent, and contracts are, for the most part, honored.

Recent headlines about homes standing empty are misleading. Homes are probably vacant because the owners are asking too high a price for what they’re offering. So, does this mean the market doesn’t need to be controlled through legislation to make things easier for tenants – and landlords – as MK Stav Shaffir (Labor) insists? It obviously can and should be, but this isn’t the way to reduce prices.

3. “I don’t want to be at a landlord’s mercy.”

Many tenants talk about living under a cloud of uncertainty, with the landlord capable of upending their lives in an instant and “throwing them on the street.” This might be so, but the uncertainty – and flexibility – is a two-way street. Tenants can also leave with one to three months’ notice.

For a young, expanding family faced with uncertain careers and changing circumstances, this is convenient and could save money. This can be true, for example, when a family chooses to put off moving into a larger home until a child arrives, rather than buying a larger and newer home before it is needed. And families who bought homes that turned out to be unsuitable – too small, in an undesirable area, or too far from where they found jobs – could end up stuck.

There is a significant element of chance in buying a pre-construction home in a new neighborhood or city. It should also be remembered that the landlord does not have grounds to oust a tenant if rent is paid on time and the terms of the contract are being met. And don’t forget, the landlord also has expenses to bear every time a tenant leaves.

4. “Israel is suffering a severe 
housing shortage.”

There is no substantive housing crisis in Israel. The problem is that prices for both buying and renting are too steep relative to income. The government needs to address this problem, primarily by increasing supply and also by improving infrastructure, education, health care and employment opportunities in areas outside Israel’s center. Overall, however, it could be said that there are enough homes to go around. As long they don’t reflect a bubble, as some people believe, housing prices actually indicate that Israel’s economy is stable.

That said, home prices still present an economic dilemma: High prices are preventing new buyers from entering the market; while many of the mortgages taken out over the past five years are predicated on low interest rates, a low unemployment rate and rising prices.

These parameters could change, so stability is a momentary phenomenon that could evaporate overnight if the economy takes a turn for the worse. In other words, the destructive potential should the economy head into recession is quite high – one of the things that most concerns the Bank of Israel.

5. The dream of owning a home: “The main thing is having my own roof over my head.”

Fantasizing about a home is fine, but does the dream need to be shared on such a wide scale among all young couples and parents? Maybe not. People can dream about maintaining good health, quality of life, friends and a happy family, and at the same time keep living for an extended period of time in rental accommodations – and even enjoying it from a financial perspective.



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