Dropping a Brick on Israel's Housing Crisis

The new finance minister, Moshe Kahlon, seems determined to make the same mistakes as his predecessor, Yair Lapid. The people who will suffer are also the same as before.

Gil Cohen-Magen

Yair Lapid chastised you with whips, but I will chastise you with scorpions, Moshe Kahlon said to himself, and decided to freeze rent prices.

The two of them – the former and current finance ministers – are Siamese twins. Instead of dealing with the real problems of the housing market, they come up with all kinds of populist ideas to gain points in public opinion. They don’t even care all that much if these ideas do nothing but harm.

Lapid’s populist patent was zero-VAT on first homes – which, fortunately, was never implemented. Lapid even promised he would halt the increase in housing prices in 2014 and bring them down in 2015. And what did we get? A rise last year and a further rise this year.

Kahlon, too, is starting off on the left foot. Instead of dismantling the Israel Land Authority and radically reducing the length of the planning and licensing process, he’s adopting the easy, populist solution: freezing rents. At first glance, it looks superb, just like zero-VAT did. With one tiny law, he’ll solve the problem of rental prices! He’ll freeze them, and the market will obey. He’ll determine the minimal apartment size, the size of the bathrooms, the width of the kitchen, what the guarantees will look like and what renovations will be included, as well as the water and lighting systems, and the result will be a decline in rental prices – a fairy tale that, if it were true, would require all the economics textbooks to be rewritten.

An OECD report has already shown that intervention in rental prices produces the opposite result: a decrease in supply and a consequent rise in prices. After all, it’s clear that if you enforce a freeze on rents for two or three years, the owners will raise the rent in advance, in order to compensate themselves. They’ll even impose a risk premium on the renter. It’s also clear that a black market will develop. And, of course, an inspection unit will have to be set up, so bureaucracy will flourish and there will be even more work for bureaucrats and lawyers – all of which will ultimately be reflected in the price.

After all, the excess demand will remain unchanged. The number of apartments for rent not only won’t increase, it will actually decrease. This “progressive” law will, for instance, cause small apartments to be taken off the market, because they won’t meet the criteria set by the paternalists in the Knesset. The MKs don’t care that many young renters are willing to live in a very small, poorly equipped apartment in exchange for a relatively low monthly rent. Why hurt them? Why intervene in the free market, which is working well?

The rental market is a sophisticated one that efficiently connects landlords to renters. The high rents are the result of an ongoing governmental failure. For years now, there has been too little construction. The state is the one that hasn’t even managed to realize its own plans for rental construction.

In its place came private investors – people who don’t just talk but also do. They are the ones who bought a second apartment and rented it out, to ensure a pension for their old age. They are the ones who put it up for rent, at a relatively low rate of return on their investment, and thereby enabled hundreds of thousands of Israelis (28 percent of all Israeli households) to live in rented apartments.

And Kahlon ought to know one more tiny fact: Rents have risen over the last eight years by 60 percent, while housing prices have risen by 80 percent. And that’s the fault of the government, which owns 93 percent of the land and doesn’t release enough of it.

In other words, if the free market hadn’t begun to invest in apartments – with its own money – there wouldn’t be any apartments to rent in Israel. So why destroy a market that’s working well?

If all this weren’t enough, Kahlon also wants to raise the purchase tax on all the “criminals” who buy apartments as an investment. The result will be a further rise in rents, and do further harm to those very same, weaker members of society he ostensibly wants to help.

It’s like we said: whips and scorpions.