A Band-aid on Netanyahu's Achilles' Heel

The prime minister's decision to position Moshe Kahlon, the man who slashed every Israeli's cell phone bill, as chairman of the Israel Lands Administration, is great for his image. It is not, however, great for Israel.

Sami Peretz
Sami Peretz
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Sami Peretz
Sami Peretz

In a brilliant move, at least image-wise, Prime Minister Benjamin Netanyahu announced Sunday evening the appointment of outgoing Communications Minister Moshe Kahlon as chairman of the Israel Lands Administration Council.

While about it he also announced that the ILA will be put under the responsibility of the Prime Minister's Office.

The message is clear: Kahlon, the man who slashed mobile phone rates, will concentrate henceforth on lowering the cost of the most expensive and painful item in our shopping carts: Housing.

The purpose of Netanyahu's coup, just 36 hours before the poll stations open, is to establish the groundwork for approaching coalition talks so his partners know ahead of time that whoever gets the Housing Ministry will get it without any control over land. But the frantic announcement was also obviously meant to rustle up another few votes, by delivering with the message a plan to deal with his weak spot: the high cost of housing.

The message may be clear, but the execution is far from it. Throughout his current term as prime minister, Netanyahu has failed to deal with the housing market despite having supposedly identified its problem right at the outset. He initiated the "balconies reform" and the national housing committees. He even made several changes in taxation meant to banish investors from the market and stem the rise of housing prices.

Kahlon's appointment kills two birds with one stone. It brings him, the Likud's golden boy, back into the fold and the PMO while placing the ILA in the hands of someone with credentials in identifying a market failure and providing a consumer-friendly solution.

But the housing market is quite different than the cellular market. Except for the fact that every Israeli needs a home and uses a mobile phone, the two have nothing in common. Cellular communications is a relatively young industry, built up over the past two decades and controlled by three companies. Regulation of the industry was put in the hands of the Communications Ministry and the minister heading it, and it was relatively simple for the minister to act as regulator and straighten out the industry. While it involved a battle with three tycoons, the equation here was quite straightforward: Three out-of-pocket tycoons versus savings for 7 million Israelis.

The situation in the housing market is more complicated. Housing prices are determined by three parameters: land prices, construction costs, and financing. The ILA has complete control over most of the country's land, with the ability to expand or modulate market supply.

Construction and financing costs are determined elsewhere. One of the reasons for the rise in housing prices over the past five years was insufficient supply. Over the space of a decade the state sold much less land than demand and natural population growth called for. When interest rates hit the floor, a gap emerged between enormous demand and limited supply. Prices catapulted upward.

Would the increased sale of land solve the problem? The answer is by no means simple. It would be easy to flood the market with land in the peripheral regions, but the supply in desirable areas isn't large and much of it is constrained by thorny obstacles.

In order to implement a significant plan for increasing land supply, including supply in popular areas, a coordinating effort is needed that involves private land owners, defense industries that hold land in the Sharon region, and local authorities. Each one of these can bog down projects for years. Lowering the price of housing can't be accomplished solely by making land cheaper. It also requires a certain measure of population dispersion to large cities in the northern and southern regions.

This is already the stage where it's not enough to have cheap land but also a need for investment in jobs, transportation, education, and infrastructure – the factors that will make those places attractive. If that's where most of the state's lands are concentrated, then it's there that a greater effort must be made to create an appealing infrastructure to attract population.

The desirable areas need an accelerated push for urban renewal projects and National Master Plan 38 initiatives (reinforcement of buildings tied to the opportunity of expanding the number of units in existing buildings). Such a move might also require additional measures in the area of taxation to keep moguls and homeowners from buying more homes for investment purposes.

Actions such as these require an extensive and coordinated plan that Kahlon is certainly capable of leading, but questionably in the role of ILA chairman. What is clear is that, if these steps succeed, Bank of Israel Governor Stanley Fischer could lose sleep over worries that housing prices will fall and complicate matters for the banking system, which extended hundreds of billions of shekels in loans the past few years for buying homes.

An uncontrolled drop in housing prices could hurt not just the banks but also people who have bought their homes at high prices in the last few years. That's another difference between cellphone services and homes: All Israelis benefited from the reduction in calling rates, but not all Israelis would benefit from reduced housing prices.

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