Israel’s Housing Crisis Deepens as Plans Fail To Deliver Relief

For many, the dream of owning a house or apartment is unattainable and it is far from becoming a reality

Israel’s real estate market is booming. Prices are soaring, demand is high and supply is low, and there is no end in sight.

With every new government that has been sworn in, the promise has been the same – to tackle the housing crisis, lower prices, and make it easier for Israelis to purchase homes. So far, the result has been the opposite.

For many, the dream of owning a house or apartment is unattainable and gets even more difficult as the cost of living continues to climb.

The steps that need to be taken to ease the housing crisis are well-known but, for various and complex reasons, things are easier said than done.

Earlier this month, Finance Minister Avigdor Liberman announced a series of measures aimed at lowering prices for purchasing a home.

These include lowering taxes on apartments, increasing the number of apartments that are exempt from property tax, canceling tax benefits for foreign investors seeking to purchase property in Israel, and encouraging construction on private property with tax incentives while increasing taxes on property owners who do not build on their land.

Politicians want quick wins and in the real estate market there are only long-time wins. There is an unwillingness to take strong steps.

The Finance Ministry also reportedly is planning to increase taxes on large apartments valued at over $1.5 million.

Just this week, the Housing Ministry completed the first round of a lottery for discounted apartments. Nearly 120,000 Israeli households applied for a $90,000 discount on apartments throughout the country. Over 10,000 apartments in 31 different cities will be made available for the winners who are found eligible for the discount.

These steps are meant to put the brakes on spiraling real estate prices, which rose by 15% in the last year alone.

According to the Central Bureau of Statistics (CBS), real estate prices in Israel have risen by 107% since 2007.

Israel is not unique, as other countries around the world also are facing a similar predicament.

However, one of the main reasons for Israel’s crisis makes it different from many other countries.

“The number of households in Israel grows an average of 2% annually,” explained Prof. Zvi Eckstein, dean of the Tiomkin School of Economics and head of the Aaron Institute for Economic Policy at Reichman University in Herzliya. “The number of apartments being built is significantly lower than this and, thus, the demand is much larger than the supply and the prices have dramatically risen.”

Data collected by Eckstein, Elisha Ziv, and Sergei Sumkin at the Aaron Institute, show that there is a shortage of 100,000 apartments every year as new households are created in Israel.

According to Shay Pauzner, deputy director-general of the Israel Builders Association (ACB), a significant decline in construction rates at the beginning of the century served as a catalyst to the current crisis.

CBS data shows that approximately 33% of Israelis do not own the property they live in; this number is slightly lower than the average in the European Union and similar to data in the United States. The population that does not own any property is the hardest hit by the housing crisis.

In addition, as the quality of life in Israel continues to improve, people are looking to purchase bigger apartments and also buy real estate as an investment.

Rent prices, especially in central Israel, have also skyrocketed in recent years. Unlike Europe or the US, Israel does not have an organized rental market, so apartment owners are free to raise the rent, further exacerbating the crisis.

Successive governments have failed to address the issue.

“Unfortunately, government policies do not give a solution for attainable housing for lower-income families,” said Eckstein. “The policies until now have given subsidies for young people who do not own property yet to have the ability to purchase expensive real estate.”

“The crisis has led to a situation in which people who are even above the middle class cannot afford to buy a first apartment,” said Rony Eyal-Lahav, an attorney and partner at Busy, Negbi, Aviani, Cohen, Eyal & Co., who is an expert on Israel’s real estate market. “It is almost impossible,” she said.

“This is because of the high cost of living in the country but also because of the equity capital needed for the purchase,” she added.

In 2009, former Israeli Prime Minister Binyamin Netanyahu announced major reforms such as reducing bureaucracy, privatizing government-owned properties, and easing restrictions on the expansion of existing properties. All these and other measures can help in the long term, something difficult for Israeli politicians operating under chronic political instability to swallow.

“Politicians want quick wins and in the real estate market there are only long-time wins,” said Eckstein. “There is an unwillingness to take strong steps.”

In 2011, Israelis took to the streets in what was one of the largest social protests the country has ever witnessed. Hundreds of thousands of people demonstrated against the high cost of living in Israel. It began as a social protest against the mounting costs of housing and was nicknamed the Tent Protest as demonstrators erected tents in public areas throughout the country and lived in them for the duration of the protests.

As a result of public pressure, the government at the time devised several plans to address the housing crisis.

“The protest did achieve something for the long term, it made the government understand there is a serious problem,” said Pauzner.

But only a few of the plans materialized, and many had nothing to do with housing but instead with other aspects of living costs.

Israel is a small country of about 20,000 square kilometers. The majority of lands eligible for housing are state-owned and the state has been reluctant to release those lands. Coupled with a high fertility rate and the constant increase in life expectancy, it looks like the crisis is here to stay.

“The land map in Israel is detrimental to the public because of extensive state ownership,” said Pauzner.

“The country is doing little to change the supply and my faith in the promises of politicians is very low,” said Eyal-Lahav.

According to Eyal-Lahav, the concentrated power structure in Israel makes it impossible for politicians to overcome and dissuades them from taking concrete steps to mitigate the crisis. Meanwhile, the state makes a huge profit from property taxation as prices rise.

But even if properties were released from national hands, Israeli bureaucracy makes for a very slow approval and construction process.

“No matter how strong a politician will be, the politics and the bureaucracy will likely kill their goodwill,” said Eyal-Lahav.

Another challenge facing Israel is urban renewal. With central cities increasingly crowded and home to an aging population, and often filled with unsafe buildings, there have been two main initiatives to improve the situation but both are lagging. One of the programs, which is also aimed at safeguarding old buildings from earthquakes, will cease next year and has no alternative to take its place.

Construction needs to be accelerated, building licensing needs to be hastened and a lot of investment in public transport is needed

Buildings that could be remodeled to house more occupants could make a substantial dent in the crisis.

“Urban renewal is in complete chaos,” said Pauzner. “Progress in this area could completely change the housing map.”

“This is a significant failure,” said Eckstein.

“I would expect to see a simple and quick bureaucratic process for a building that wants to be renewed,” said Eyal-Lahav. “There are no losers here. But the bureaucracy between the government, the local municipalities, and the Finance Ministry makes it impossible. This could be solved immediately through legislation.”

For municipalities, an increase in the number of inhabitants would mean an increase in expenditure. The rate of municipal taxes collected does not come close to the cost of services each local authority needs to supply. Hence, municipality heads are not inclined to promote urban renewal.

According to the ACB, there is also a chronic shortage of construction workers in Israel. Israelis tend to shy away from construction work, leaving the sector for Palestinians and other foreign workers. This requires government permits, which the government is reluctant to increase.

Public transport in the country is in desperate straits and it is well known that it needs an upgrade. Pressure to live in central areas due to access to employment is also feeding the crisis. People do not want to live in areas of the periphery where public transportation is not as readily available.

“Construction needs to be accelerated, building licensing needs to be hastened and a lot of investment in public transport is needed,” said Eckstein, who sees a direct link between the dire situation of public transportation in the country to the housing crisis.

“We are in an emergency situation which merits emergency measures,” said Pauzner. “Within three years, we need to sell at least 300,000 apartments that are currently in planning stages.”

Seeing as no major changes are in the works, it is likely the crisis will continue and even worsen.

With the population growing, the gap in the number of houses needed is only getting wider.

“I do not foresee any reduction in housing prices and they will even increase further, there is a snowball effect,” said Eyal-Lahav, “As long as it is not a government priority, there will not be a change for the better.”