Israel Fated to Suffer Another Wave of Housing Price Increases

Government neglect is creating severe supply bottlenecks, slowing the pace of construction. Industry sources call it a ‘catastrophe’

Gili Melnitcki
Gili Melnitcki
Apartment complexes being built in a new neighborhood of Beit Dagain, September 13, 2020.
Apartment complexes being built in a new neighborhood of Beit Dagain, September 13, 2020.Credit: Tomer Appelbaum
Gili Melnitcki
Gili Melnitcki

Israel is experiencing its worst economic downturn ever and the recovery is expected to be protracted amid persistently high unemployment. But that doesn’t mean the country’s sky-high housing prices are going to fall. Rather, they’re poised for years of increases, the building industry warns.

Government paralysis and the coronavirus health and economic crises are weighing heavily on the housing market. In the housing industry, sources often use the word “catastrophe.”

An internal report by Bonei Haaretz, the association of building contractors, paints a grim picture. Land marketing by the government, which controls the vast majority of land in the country, has slowed and critical market reforms have been frozen, which will lead to higher home prices.

Israel suffered nearly a decade of sharply rising housing prices, which Moshe Kahlon sought to rein in after he became finance minister in 2015. He slowed the increase to a degree, but prices earlier in the pandemic climbed 2.9% in June-July from a year earlier.

“We’re going to have a lost generation here in the coming years that will be forced to pay a lot more for a home because our politicians don’t look beyond the next election cycle. For the last two years, the housing market has been stuck,” said an industry executive who asked not to be named.

The Bonei Haaretz report says that in the first half of the year, land sales by the government plummeted. Land designated for just 7,000 new homes was marketed in January-June, compared with land for 14,000 homes in the first half of 2019 and 19,500 in the first half of 2018.

The association estimates that for all of 2020, completed land sales (meaning contractors successfully bid on land being auctioned) won’t exceed an amount equal to 15,000 housing units. That will be half or less than the annual average of 30,000 to 40,000 over the last several years.

“Since the start of the year, we’ve stopped buying land from the ILA because there have been so few tenders and because in the private market it’s hard to find big enough plots that don’t involve [legal complications], said Arnon Fridman, CEO of the property company Ashdar.

When the state isn’t inviting bids and developers have less and less in inventory for construction, there will be fewer new homes on the market in the years ahead. The association predicts that housing starts will continue to decline in the years ahead.

Bonei Haaretz doesn’t expect the situation to improve in the foreseeable future due to the coronavirus crisis, the disarray in Prime Minister Benjamin Netanyahu’s government and uncertainty about the economy. Housing policy has been chaotic, with Construction and Housing Minister Yaakov Litzman resigning last month over coronavirus policy (although he is expected to return to the post shortly).

“The housing-buying public should be worried – contractors less so,” said Shaul Lotan, CEO of the property group Meshulam-Levinstein.

“The coronavirus hasn’t dramatically harmed the pace of work at building sites, but the number of land auctions the government has conducted has fallen at a time when the Mechir L’Mishtaken [Buyer’s Price] program has paralyzed land marketing to the free market,” he said. “In addition to those two factors, there have been delays in planning committee authorizations and the issuing of permits to local authorities.”

Haim Feiglin,CEO of Zemach Hammerman, said the post-pandemic era will leave the Israeli housing market contending with long-term challenges.

“The coronavirus will pass in another six months or a year, after which it will just be a memory, but the pandemic won’t end the real problems the government must address – population growth versus the dysfunctional Israel Land Authority. This is a monopolistic, rigid organization that stonewalls developers,” he said.

In recent years, the government has been saying that Israel must have about 60,000 housing starts annually to meet demand. Bonei Haaretz forecast that this year won’t see more than 40,000, down from 51,000 in 2019, 52,000 in 2018 and 53,000 in 2017.

To have the 1.5 million housing units the government believes Israel will need by 2040, the pace of building would have to reach 65,000 starts annually – far more than the current pace.

In the first half of 2019, the authorities issued about 30,900 building permits for new housing, but a year later only 22,700 units were actually under construction.

“Small builders are more vulnerable and fragile during an economic crisis, so many of them have slowed their pace of construction starts,” Feiglin said.” The banks are preoccupied with existing loans and problem-solving, not in identifying new deals and real estate projects. Bigger companies, however, have a relatively easy time getting bank finance, so they can almost engage in business as usual.”

A major component of the government’s long-term strategy for increasing Israel’s housing stock has been urban renewal projects. Between 2017 and 2020, urban renewal projects were supposed to account for 20% of all new housing approvals, rising to 25% in 2020-2025 and 35% in 2026-2030.

But Bonei Haaretz said the target isn’t being met. The main reason is that the TAMA 38/2 program to raze and rebuild residential buildings is operating at only about 60% of its level in the first half of 2019. The program has been plagued by doubts about its future after the treasury’s Planning Administration declared more than a year ago that the wider TAMA 38 program would expire in October 2022 – before the administration approved a new program to take its place.

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