The Gatekeepers of Israel's Housing Bubble

The real estate bubble isn't hurting those whose decisions influence home prices – in fact, under current circumstances, maintaining the bubble is crucial to them.

Let’s start from the end. Although Israel has been experiencing a real estate bubble that included monstrous 60 percent price hikes over the last few years; although skyrocketing home prices sent hundreds of thousands of people into the streets two years ago; although the promise to lower housing costs was part of every party’s electoral platform, chief among them Likud-Yisrael Beiteinu's and Yesh Atid's; despite the formation of a “housing cabinet” and an ambitious plan published this week by the finance minister and cellular prince Moshe Kahlon, who, fresh from Harvard, will soon assume the chairmanship of the Israel Lands Authority – despite all of this, home prices in Israel aren’t going to drop in the next few years. At best – and this is apparently policymakers' dream come true – they will stop soaring quite so fast and inflation will erode their real worth a bit.

It isn’t clear whether Prime Minister Benjamin Netanyahu, the champion of the housing expediting committees and balcony reforms, has despaired of ever effecting true reform at the ILA – which is now called an “authority” and not an “administration” but remains the same lands monopoly that sits on the spigot and starves the market – or, as with the economic decrees, he’s happy to pass the buck to novices Finance Minister Yair Lapid and Housing Minister Uri Ariel.

Perhaps he is convinced that, despite the declarations, the committees, the plans, the documents, the cabinets and the war rooms, no one other than home buyers really has an interest in reducing housing costs. What’s more, as the bubble expands more and more, the shock of it bursting – that is, reducing home prices by 30 percent, as the politicians promised – is liable to cause an economic catastrophe.

Developers and contractors, naturally, have no reason to want home prices to drop. The banks who give them credit, but who primarily give credit to home buyers, certainly aren’t interested in being stuck with an inventory of liens whose value will diminish. Not to mention the fact that they are making very nice profits in the mortgage market.

The ILA, which controls most of the nation’s land, isn’t interested in flooding the market with the treasure it holds, since it gets a higher price on each square meter by releasing it in dribs and drabs.

And the finance minister and prime minister? They are enjoying the fact that the 73.4 percent of Israelis who own their own homes believe they are holding on to an asset whose value is increasing, because this leads them to spend more money. A Bank of Israel study released this week shows that the sharp rise in home prices from 2009-2011 led to an increase in consumer spending during those years, which offset some of the global economic crisis’ influence on the Israeli economy.

The two of them certainly don’t want people to suddenly realize they’ve mortgaged themselves to an asset whose value is liable to drop dramatically, because then they will spend less. And that will drag the economy into recession and unemployment, which would ultimately put their ability to pay their mortgages at risk.

So we come back to the banks, the banks supervisor, and the Bank of Israel governor.

In short: This bubble isn't hurting those whose decisions influence home prices; in fact, under current circumstances, maintaining the bubble is crucial to them.

So how will apartment prices ever go down? That will only happen if people stop buying apartments, particularly by over-leveraging themselves to the point of insanity. But as we’ve seen from the herd mentality with regard to real estate that’s prevailed in recent years, Israelis simply aren’t capable of such restraint. 

Real estate properties in Tel Aviv.
Ofer Vaknin