The Real Person to Blame for Israel’s Surging Housing Prices

Finance Minister Moshe Kahlon should stop blaming the central bank and release land for development.

David Bachar

If there’s something that drives Finance Minister Moshe Kahlon crazy, it’s the attempts to mock his “success” in lowering housing prices. At the beginning of the week, Prof. Zvi Eckstein earned the wrath of Kahlon’s supporters. “Charlatanism and ignorance,” they angrily called Eckstein’s justified criticism of Kahlon’s flagship programs to lower housing prices.

In the middle of the week, it was Nadine Baudot-Trajtenberg, the deputy governor of the Bank of Israel, who fell victim to the Finance Ministry’s anger. She said that not only had the cost of buying a home not dropped, it had risen. There were three reasons: a rise in home prices themselves, a rise in the length of mortgages, and a rise in mortgage rates.

Avigdor Yitzhaki, Kahlon’s right-hand man for housing, had this to say: “The thief comes and steals, and then goes to complain to the police that someone stole.” But Baudot-Trajtenberg hasn’t stolen anything. After all, we all know that the Bank of Israel has been trying to make mortgages more expensive for years.

The central bank fears the day when interest rates around the world and in Israel rise and the economy enters a recession. The public will be caught in a three-way trap: Wages will fall, mortgages (with variable interest rates) will become more expensive, and housing prices will fall. Then the public won’t be able to meet its debt payments, the banks will repossess homes, housing prices will plummet and the banks will run up large and dangerous losses.

This is the reason the Bank of Israel is making it harder to take out a mortgage. The central bank is curbing the taking out of variable-rate mortgages, and making draconian demands on the amount of capital banks must set aside for those mortgages. This is a legitimate policy whose goal is to reduce risk in the banking system.

The strange thing is that the very same Finance Ministry is criticizing the Bank of Israel from the opposite side. The treasury claims that the Bank of Israel is responsible for the rise in housing prices because of the low interest rates it sets, which encourage people to move their money from bank deposits into real estate.

It is said about such things: You’re all mixed up. You’ve forgotten the Bank of Israel’s role. It’s not responsible for housing prices. It’s responsible for the level of inflation and stability, and to a certain extent for economic growth and exports.

Moshe Kahlon, March 30, 2016.
TheMarker screenshot

Today the central bank has no choice but to preserve the near zero interest rates, similar to those all over the world. If the Bank of Israel dares to raise interest rates, it will send the economy into a much more severe slowdown than the present one, and even into high unemployment.

But at the Finance Ministry they love to look for outsiders to blame; it’s a well-known ploy of finance ministers and their economists. In the mid-1990s, then-central bank chief Jacob Frenkel launched an anti-inflationary policy. He raised interest rates with the goal of inhibiting demand and thus reducing the high inflation.

This policy had a price, an economic slowdown, which Finance Minister Avraham Shochat and his senior officials did not like. They banded together and harshly criticized Frenkel; they even invented the myth of a “shekel mountain” that one day would collapse and bury us all. They made things miserable for him, even though Frenkel was right and nearly achieved zero inflation, whose advantages were enormous.

That’s why we don’t need to be impressed at all by the treasury’s onslaught of criticism against the Bank of Israel. Kahlon should aim his arrows at himself.

The main reason for the continued rise in housing prices is the low supply of homes. In recent years, because of a limited sale of land by the government, a shortage of 135,000 housing units has developed. Kahlon needs to make up this shortage by massively releasing land and by dealing with issues of infrastructure and construction workers so that the annual pace of construction rises to 80,000 units at the very least.

As long as this doesn’t happen, Kahlon will remain the person most responsible for the continued rise in housing prices.