Let’s assume for a moment that the situation was the other way around: that housing prices had not spiked over the past year by 13 percent, but had fallen 13 percent. And imagine that not only did they fall by 13 percent, but that the forecast was for a further decline in prices in the coming year. What would the Bank of Israel do?
This is what it would do: It would immediately call an emergency meeting; conduct stress tests to see whether the banking system could withstand such shocks; demand that the banks immediately increase their capital and cash reserves; demand a report on risk exposure to declining prices in various towns and neighborhoods; and take other actions to stop the falling prices.
What does the Bank of Israel do when housing prices go up? Not a lot. Usually it prepares some academic analysis of the trends in the industry, points out positive steps the government has taken (raising purchase tax, increasing planning for new homes) and, at most, notes dryly that the ball is in the government’s court and it must create the supply that reflects the population increase.
The sharp spike in housing prices puts both the government and the Bank of Israel in a conflict. The government enjoys the rising prices because this increases its tax revenue, and provides people who own an apartment with a feeling of wealth (which supports private consumption).
So why the bind? Because the rising prices come alongside the rising cost of living, which is already high, and together they are a recipe for social and political unrest. Even though there are always distractions like COVID or the war in Ukraine to capture media attention, this unrest has been building for a long time and we cannot know when it will erupt.
The Bank of Israel is in a bind for another reason. Its interest rate policy is intended to support economic growth, but it causes damage and swells asset prices in the capital and housing markets. The continuous increase in housing prices since 2007 has led many people to think that “housing prices can only go up,” and there is nothing more dangerous than this mindset when it comes to creating a bubble. The Bank of Israel would prefer home prices to increase more moderately. Not for social reasons, but rather out of concern for stability and the need to allay pressure to raise interest rates.
There are five people directly responsible for the sharp surge in housing prices over the past year: Former Finance Minister Yisrael Katz; Bank of Israel Governor Amir Yaron; current Finance Minister Avigdor Lieberman; Interior Minister Ayelet Shaked and Construction and Housing Minister Zeev Elkin. They all contributed.
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Yaron works differently than his predecessors, and so far he has not felt the need to take significant steps to cool the housing market. On the contrary, at the end of 2020 he promoted a move that increased demand for housing, when he increased the percentage of a mortgage loan that could be linked to the prime interest rate. This made it easier for buyers by reducing monthly payments, but thus also increased demand. The reason for the move was the COVID crisis. The Bank of Israel worked robustly to prevent the crisis from worsening, using every tool at its disposal. Easing mortgage financing was one tool too many.
Former Finance Minister Katz used many tools, one of which was also one too many: He lowered the purchase tax for those buying apartments as investments. Yaron and Katz thought that these were steps that encouraged growth, but instead they fanned the flames of housing prices.
They aren’t the only ones. They were aided by three ministers in the current government – Lieberman, Shaked and Elkin. From the moment they assumed their positions, they repeatedly warned that housing prices would increase. While this was ostensibly done to tell the public the truth, it served as a clear signal to the public to run out and buy an apartment as fast as possible. Prime Minister Naftali Bennett realized at some point that statements that create expectations in the housing market mean something, that they ignite prices, but he left the ministers to act, as if the issue didn’t involve him.
As far as the ministers are concerned, this is not a failure. They see the upside: The value of apartments has risen for those who own them, and most of the population in Israel (67 percent) own their home. So there are more people happy about the situation than unhappy. From the Bank of Israel's perspective, central banks usually deal in downside risk, meaning the financial risk associated with losses. But in the face of rising housing prices, they realized it was time to check the upside risk from ballooning prices.
Yaron spoke recently about risks of this type in the context of capital market assets, and he knows that sharp price increases in the housing market bring great risk. It will be no surprise if he soon comes out with a package of steps to reduce risks to banks, but these steps will temper risk, not housing demand.
That leaves the government to solve the problem of low land supply for construction, but it has no plan to stop the price increases. Lieberman said on the matter, “There’s no hocus pocus in real estate, it’s a process” – but the government in which he serves has played a major role in the rising prices. It declared in its guiding principles that its goal was “to moderate housing price increases.” Not to maintain price stability or lower prices, just to moderate increases. But the government didn’t even keep that promise. Instead, its declarations did the exact opposite, sending people racing to buy apartments.
Yes, it’s true, the current government also has to deal with the COVID crisis that is still with is, and now there’s the war in Ukraine that threatens world peace, and there’s the nuclear agreement with Iran, and many more strategic challenges. But the cost of living is also a strategic threat, especially when it comes to housing prices, which create huge gaps between those who have managed to buy a home and those who can't.
The value of an average apartment has increased over the past year by 180,000 shekels ($55,469), and that’s much more than what we could save as a result of the reforms the government is pushing for imported fruits and vegetables, meat and consumer items; in kashrut; and more.
The lack of willingness on the part of the government and the Bank of Israel to come out with an emergency plan to stop the surging home prices shows that they don’t see this as a big enough problem. When the prices spike by another 13 percent next year, maybe they’ll think differently.