The Shekel Drops / Pointless Posturing Over Home Prices and Imaginary Radio Shows

The only possible solution for rising housing prices is to truly increase the housing supply.

1 Housing prices are a sore point for just about everyone. Their steady increase confounds the young, worries their parents and has politicians losing hair. What to do about it? They feel compelled to whip rabbits out of their hats, but the rabbit hasn't been born who could solve this problem.

Bank of Israel Governor Stanley Fischer attacked the problem by raising the price of mortgages. Finance Minister Yuval Steinitz suggests depressing demand through taxes. Housing Minister Ariel Atias proposes to subsidize mortgages for young couples who deign to buy housing outside central Israel.

None of these moves will work. Raising the price of mortgages has had practically no effect because even after Fischer's moves, mortgages cost less today than in the 1980s. The Finance Ministry's tax manipulations won't help either - they are a figment of pricing theory, not a useful tool in real life.

What the treasury has in mind is to temporarily increase purchase tax on dwellings bought for investment purposes. The idea is that the higher tax rate will deter potential buyers of homes in which they don't plan to live, but to rent out. That in turn would increase the housing supply. The ministry also proposes to temporarily forgo betterment tax to encourage homeowners to sell. The two steps are designed to increase the housing supply, which would cause prices to drop.

It won't happen. The treasury seems to be assuming that its tweak to purchase tax can't be bypassed, and that investors buy these dwellings and leave them empty, which is nonsense - they rent them out. It's a zero-sum game. If the treasury were to manage to discourage people from buying dwellings to rent them out, the supply of places to rent would drop and the price of rent would rise.

Atias' sloganeering about subsidies is also useless. It may play well in Sderot but it isn't economically sound. It will simply increase the price of housing even more because the demand curve for housing is very rigid - practically vertical. The moment demand for housing in the country's outskirts increases because of subsidies, housing prices will simply rise by the same amount as the subsidy. Young couples will gain nothing, though housing developers will gain. And people not eligible for subsidies will suffer because housing will cost even more.

The only possible solution in the short run is to truly increase the housing supply, which can be done by pushing forward with approved construction plans and letting builders add, say, three stories to existing buildings. That's what is being done in Ramat Gan: one extra story based on National Master Plan 38 and another two under a regional master plan. If it can be done in Ramat Gan, why can't it be done nationwide?


2 The wonders of statistics: As I have said before, statistics is a wonderful thing, but it suffers from limitations to data collation. For instance, the poverty report is twisted because the Central Bureau of Statistics doesn't factor in "black income" - work people do for cash, or barter, without issuing invoices, on which they don't pay tax. Another distortion is caused by the misleading definition of "breadwinner."

The upshot is a distorted picture of poverty in the ultra-Orthodox and Israeli Arab communities.

I recently received two letters from readers with relevant anecdotes. The first mentioned Avraham Shochat, who when serving as finance minister in 1999 tried to pass a law imposing capital gains tax on gifts and stock market profits. While about it, he also tried to impose estate tax.

His proposals aroused fierce resistance among the well-to-do, of course. But one day Shochat received a delegation from the party United Torah Judaism, which also fiercely opposed the new taxes. "Why do you oppose it?" Shochat asked. "You're dirt poor. You shouldn't have any problem with these taxes."

The delegates looked at him and said, "You know that all our young couples that get married receive an apartment from their parents?"

But, Shochat said, Haredi families are huge. How could parents buy apartments for all their kids?

"Ask not about things beyond your understanding," the delegates said mysteriously, and left.

The second anecdote is about data collation. The story takes place after the Six-Day War, when the Central Bureau of Statistics sought to conduct a survey on the listening habits of people in the West Bank to Israel Radio in Arabic.

The radio station manager, Yaakov Hazma, said the survey was a waste of time because the respondents would say whatever suited them, or whatever they thought their interlocutor wanted to hear. But the people above him insisted, so he put together 10 questions, into which he slipped one about a show that didn't even exist - "A thousand and one nights."

The survey, conducted with the utmost scientific precision, found that 68% of respondents faithfully listened to the nonexistent show, and liked it very much.