Published September 10, 2017 by Tzvi Shapiro

Savings graphicMoshe Kahlon doubled down on his “Buyer’s Price” program which aims to turn thousands of young Israeli couples into landlords homeowners by announcing that the program will extend until the end of 2019.

Speaking at the International Economic Forum hosted by Calcalist in Tel-Aviv the Minister of Interior said “those who are attacking the program aren’t attacking me… they are attacking the young couples and their dream of (owning) an apartment.”

Cutting through the red tape and enabling the “dream of owning an apartment” certainly sounds like a noble cause.

Thousands of young couples currently renting or living with their parents could finally afford to move into a house of their own. Unfortunately, quite the opposite appears to be happening.

The Achilles heel of the program

According to the latest figures, 60-80% of the couples eligible for the program entered into lotteries for apartments in cities in which they did not live. While it is possible that these couples intend to pick up and find new jobs and schools for their children close to their new subsidized apartments, it is more likely that a majority of these couples intend to rent out these apartments in hopes that the rental income will cover their mortgage payments.

Of course, this isn’t a standard mortgage. The program allows for up to 90% financing thereby putting these young couples into a highly leveraged investment.

To further exacerbate the problem, who says that there is demand for thousands of apartments in places like Ofakim and Kiryat Shmona?

If the thousands of young couples enrolled in this program can’t find renters they will almost certainly default on their mortgage and potentially cause irreparable damage to the real estate market at large. This is the Achilles heel of the program.

Many of these couples may only be purchasing these properties with the intention of renting it out as the program does not require the purchasers to live in the property.

What can be done?

So what can be done to allow young couples the opportunity to own their own apartment while ensuring that they live in the property (to minimize the risk of default)?

One option is to provide financing up to 95% for first time homebuyers while requiring that the buyers occupy the property for a minimum of 5 years.

Furthermore, with the roughly 2 Billion NIS per year which the government would be saving by scrapping the “Buyer’s Price” program, they could provide guarantees to the banks for the extra 20% financing above the 75% LTV which is currently being offered, thereby incentivizing the banks to embrace the program.

An army of landlords speculating on the rental market

This money would not even need to be paid out – rather it would just need to be guaranteed in the event of default.

By allowing consumers to finance purchases in any area that they choose to live in we relieve the government from having to look into their crystal balls to try and anticipate where these young couples may want to settle down – an almost impossible feat.

Of course, this solution does not provide for artificial discounts towards the prices of properties. However, young couples looking for “discounts” and armed with extensive financing options may then choose to move to the periphery as a means of building wealth and getting more for their money – an ancillary goal of the existing program.

Considering the Land Authority’s unwillingness to increase the supply of real estate, one point that I do agree with Moshe Kahlon on is the fact that the government will have to take on risk in order to make the dream of home ownership a reality for young couples.

That being said, we should bet our chips on young couples looking to build a home for themselves to live in and not on building the next army of landlords speculating on the rental market.

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