Call It Vertigo

When builders quake, housing prices can't go down

A well-known figure in real estate circles, famous for his daring, explained this week why he won't build residential projects these days. "I'm scared," he said.

One would think that this man, also famous for spotting opportunity before anybody else, would take advantage of the high housing prices to whack together a few apartment buildings and rake it in. But no. He's afraid. Mainly, he's afraid of the fog - will home prices really drop, as potential buyers hope? Or not, as current homeowners would prefer?

What, actually, does he fear? Of paying a fortune for a building lot, starting to build and then getting stuck with apartments he could either sell at a loss or not at all. Construction involves planning ahead by two or three years. High prices could be here today and gone tomorrow.

Starting a project today is akin to getting into the bourse after stocks double in price, say developers. It's called vertigo. Our man has already seen that movie. He's built projects that failed to sell and spent day in and day out at his bankers, begging them not to cut him off.

Can Fischer cool the demand?

It's a vicious cycle. The high prices feed the builders' vertigo. They stop building. Supply drops. Prices climb even more. And throughout, the builders feel that low interest rates won't be here forever. When they climb, the cost of mortgages will too, and demand will dwindle.

It seems that the only entity trying to restore sanity to the market is the Bank of Israel by requiring banks to charge more for loans that comprise more than 60% of the apartment's price. It's also applying limitations to purchasing groups.

That's one side of the equation: the demand side. It remains to be seen if Bank of Israel Governor Stanley Fischer did manage to cool that: he has stated that present housing prices are too high.

Fischer is also afraid. Of what? That the banks will continue to lend too much for housing, which in turn is keeping housing prices high and is helping to create a bubble.

The Bank of Israel's warnings about a real-estate bubble frighten the builders. They could create a vicious circle, too: builders fear to build, supply drops even more and housing prices rise further.

What's needed is systemic government thinking.

The Bank of Israel isn't thinking about tenants: it's thinking about the stability of the banks. Too many financial crises have originated in real-estate bubbles. Fischer doesn't want that on his watch.

The Finance Ministry steps in

There is an anomaly in Israel: normally, says Fischer, low interest rates means a lot of people buy homes, which lifts prices, but the increase in prices didn't spur an increase in supply. That's because of a shortfall of land.

Cue in the Finance Ministry. It came out with a half-baked plan to increase the supply of land, based on abolishing an old decision to halt building in central Israel, in order to get people to move to outlying regions, not to mention, to revitalize projects stuck in limbo for years.

What projects? Evacuating the Israel Military Industries lands in the southern Sharon, Glilot, and so on.

It's asinine. A serious country would have long ago cleaned up those befouled lands and built housing that would relieve the stress. The hasty manner in which the Finance Ministry presented its plan shows that its main goal was good press. It wasn't a genuine attempt to solve the chronic planning problems going back generations.

The ministry based its plan on a demand analysis from the Israel Lands Administration. It found that for supply to meet demand, 45,000 apartments a year need to be built, compared with the present pace of 30,000.

How does one build 45,000 homes? One aims to build 70,000, knowing that something will frustrate the construction of 25,000.

That policy proposal shows just how incompetent Israel is, and has been, at execution.

Bad executor! Bad!

Looking at dozens of government resolutions over the ages, we find again and again that everything falls down at the stage of execution. The government is good at compiling opinions, setting rules, suggesting and budgeting - but falls at execution.

If Prime Minister Benjamin Netanyahu wants to further his vision, he has to create a program based on clear criteria of execution and positive (and negative ) incentives.

The housing market is a simple one. It would be easy to do a pilot run, defining clear goals and criteria of execution. The demand is there: All that's needed is to increase supply. If the government can't do that, we'll know it can't do anything practical at all, not in terms of trains and roads, not in education, not in economic reforms.