Published June 20, 2021 by Tzvi Shapiro

Jerusalem real estate image

“The problem is a lack of supply in the housing market,” said the co-founder of First Israel Mortgages. “The only way to bring down prices is to build more homes.”

By Zev Stub

June 20, 2021

Israel’s housing prices continue to rise sharply, with no sign of slowing down. Last week, the Central Bureau of Statistics reported that average home prices rose by 5.6 percent over the past year. Meanwhile, new Housing and Construction Minister Ze’ev Elkin told a conference for the Israel Builders Association that prices are going to continue to rise even more dramatically in the coming year.

At the same time, Israel’s new government has made lowering housing costs and increasing affordable housing options some of its key goals for the coalition. So what can new Elkin do to try to reign in prices?

Elkin’s spokesman told The Jerusalem Post that he is currently working on formulating a plan for reducing prices that should be ready in about two weeks. Until then, there will be no comment, he noted.

To many, what needs to be done is clear. “The problem is a lack of supply in the housing market,”  said Tzvi Shapiro, co-founder of First Israel Mortgages. “The only way to bring down prices is to build more homes.”

The Israel Land Authority (ILA), the government body in charge of managing the use of land in Israel, is widely blamed for a large part of the problem. New lands for building are not being made available in an efficient or transparent fashion, and a recent report by the state comptroller charged that the office doesn’t have a medium- or long-term strategy for implementing its mission.  Indeed, despite the pressing national need for increased building, the number of new housing starts is actually falling. Housing starts have dropped each year since 2016, and in the first quarter of 2021, there were just 12,100 building starts, 20% than a year earlier and the lowest quarterly figure since 2012.

Elkin’s main job will be finding a way to free up much more land at a faster pace, Shapiro said. The government has set a target of adding 300,000 units to the home market, while just over 50,000 are currently being approved each year.

Some have suggested that higher taxes will need to be used as a tool to reduce housing demand. Last July, Then-Finance Minister Israel Katz cut purchase taxes for investors buying more than one home, reversing a decision made in 2016 by his predecessor, Moshe Kahlon, to increase taxes on investment properties. The number of investment purchases in the market has skyrocketed since then, further fueling price increases.

Shapiro agrees that raising taxes would help, but not enough to significantly change the trajectory of prices. “The only thing that would really affect prices is making more homes available,” he reiterated.

Elkin has indicated he is in favor of continuing and extending the Tama 38 National Outline Plan that allows for contractors to add additional floors to apartment buildings in exchange for reinforcing them against earthquakes. That plan has helped large cities like Jerusalem expand their housing stock in areas that are already filled. However, many Tama 38 projects are criticized for overpopulating urban areas and making them less liveable.

Plans are also being developed to encourage long-term rental units that would allow people to continue to rent in the same space for many years. Such buildings, common in most cities around the world, generally don’t exist in Israel. Many of the rental units that exist are ultimately earmarked for another purpose, like for a parent to eventually gift to a child.

Plans to offer subsidized apartments for sale at lower costs, like Kahlon’s now-discontinued Mechir Lamishtaken program, have been discredited as unsustainable market interventions that failed to affect market prices in any real way.

Others have suggested that the Housing Ministry work in closer cooperation with related authorities, like the Transportation Ministry, to coordinate long-term plans toward national goals. “Of course, it would be good to create better opportunities to better serve specific areas and incentivize people to move there,” Shapiro said.

Finally, Shapiro suggested that a different approach toward the problem could yield a different solution. “Rising prices are a problem, but another challenge is how to make homeownership more of a reality for first-time buyers,” he said. “Currently, buyers are allowed to borrow up to 75% of the purchase price as a mortgage. It used to be that people with sufficient income could borrow much more than that by taking an insurance policy to insure banks for everything above 75%. However, that was ended in 2012 because it represented too great a risk to the economy. That may have been a safe move, but overnight, it made it impossible for many people with good-paying jobs to buy homes because the down payment was so expensive.”

Removing that limitation on buyers who earn more than a certain level would make ownership possible for a lot more people, Shapiro said. “it may be that this might cause prices to go up even more in the short-term, but this is something the government owes to young buyers, and it should find a way to work this into its plan.”

For more, see: First Israel’s mortgage services and the current interest rates in Israel.