Taking Stock / High Home Prices Are a Cancer

The social justice movement has yet to internalize the importance of a progressive public sector.

It aspires to change the economic system, lower the cost of living, bring justice, change values, raise living standards and create a welfare state while about it.

There are some voices within the protest movement that fail to dominate, which call for Israel to build a true competitive market economy that would replace the system of back-scratching socio-capitalism, which serves the Big Government-Big Business-Defense juntas as they suck the marrow out of the people.

People with grandiose pretentions must know that changes of the sort they aspire to instill take a long time. It took five years for the public (and the regulator ) to truly grasp the cost of economic concentration, the price of stifled competition and the damage caused by the structure of the business sector and capital market. Changing perceptions of the public sector, labor market and defense establishment will take at least as long.

The struggle will be long and the powers that like things the way they are are powerful. The monopolies, big banks, conglomerates and their pet newspapers will do everything they can to maintain the status quo. Sometimes they will behave aggressively. Sometimes they'll be subtle and manipulative. But they will always keep their eyes fixed on the goal - to keep things as they are.

The protest movement would do well to embrace change of the public sector. Until now the narrative has taken one of two roads: The public sector is a mess and should be privatized and pared back; and the public sector is a mess and needs fixing through heavy deficit spending.

Both narratives are out of date and extremist. Israel needs a strong, effective, progressive public sector. Without it there can be no social justice, no increase in living standards and no social and economic stability. A strong public sector means excellent systems of education, health care and welfare, and rising productivity and competitiveness.

Is it coincidence that one of the world's best and most equitable education system is in a country with one of the most efficient, competitive public sectors in the world? I mean Finland. Is it coincidence that welfare states like Denmark have flexible labor markets, where bad workers (and good ones ) can be fired? Where what is protected is the livelihood, not the specific job?

A strong public sector isn't one with powerful unions, ballooning budgets or ludicrously high pay in institutions bloated with tenured workers that suck their sustenance from the state. A strong public sector is an efficient, advanced and clever one that attracts good people, ejects the bad ones and produces advanced services.

The reforms required to Israel's public sector are vastly complex. Clearly the process of change will take long years, during which interim despair may prevail, cynicism reign supreme, and politics and human nature will mar the process and try to stop it. But good people will come to realize that there are no choices; the state must have a strong, effective, advanced and fair public sector; and once they realize that, the level of despair and cynicism will start to drop. The trick is to make the process happen before the best people give up and abandon Israel in their thousands.

Some political personalities, mainly on the left, have been trying to leverage the protests, not for the sake of conceptual and cultural revolution that would enable far-reaching change, but for the sake of immediate gratification - to blame the incumbent government and brand it as responsible for all Israel's economic ailments. But the pros know that there hasn't been any real difference between left and right economic policies in Israel for decades. The distortions in Israel's economic and social systems didn't start with Netanyahu, not now and not during his previous stint as prime minister.

Nor will the revolution come with the next election, whoever wins. Politics in Israel won't be changing. It will continue to serve the narrow interests of pressure groups, at least until the public's perceptions change. Change has to start with the public's perceptions, which takes time.

Not all economic changes take eons. Some achievements could be racked up fast. Note that all it took to revolutionize Israel’s cellular industry is one gritty minister and three years of TheMarker writing on the topic. Household users now pay as little as a tenth of their former bills for cellular communications.

Housing could be next. Lowering prices by as much as a third could take as little as two or three years. Here no change in public perception is needed − just willpower and commitment by the prime minister.

Housing prices underlay the social-justice protests ‏(among other factors‏) last summer for good reason. The upward spiral of home prices in recent years poses a true danger to Israel’s economy and society. During the last month, signs have proliferated that housing prices are starting to climb again. People are taking out mortgage loans like candy. Each month that Israeli households buy housing which is overpriced, relative to their long-term earning power, creates more poverty and anger.

These people buying apartments for millions of borrowed shekels are mortgaging their future for decades. Repayments will eat up a huge part of their disposable income, curtailing living standards for them and their children, gobbling up money that could have been used on education, food, culture and entertainment. It won’t be long before Israel has a whole new class of unhappy people.

Housing prices are rising not only in prime areas but everywhere, from Tel Aviv to Be’er Sheva to Ashkelon, from Ashdod and Netanya to Hadera. In five years prices have risen as much as 70%. Hundreds of thousands of families are further from the dream of their own home. There are many reasons why housing prices exploded. First and foremost is government policy. Worse is that in the last three years, the government and financial system have become “addicted” to the high level of housing prices and bubbly action in the real estate market.

How’s that? The government and Bank of Israel don’t want to talk about it. But if housing prices are to drop significantly, the banks would lose a fortune, tax collection would decrease and the government deficit would mushroom.

What’s required is leadership, by the prime minister and Bank of Israel governor. Once they realize and accept that the high level of housing prices is a social cancer, they will have to show leadership. They can’t sit there praying that the story won’t explode until they leave office.

Netanyahu needs to set a crystal-clear target: to lower housing prices by 30% in three years by dramatically increasing the land under development and cutting at the red tape.

Bank of Israel Governor Stanley Fischer needs to prepare a contingency plan for the banks, in case of heavy losses thanks to the drop in property prices. There are ways to assure the robustness of the tax system and the financial system as well.

The economic challenges Israel faces are vast. The financial tsunami from Europe and danger of an all-encompassing global crisis are growing. Most of the solutions to the economy’s structural problems, such as improving education and integrating the Arab citizenry, are complicated and will take time. Lowering housing prices is a lot simpler. All it needs is for these two people to want it to be so.