Government housing plan seen as just a ‘drop in the bucket’

The Israeli government’s new housing plan, aimed at increasing the supply of apartments to help reduce soaring prices, is a mere “sideshow” and a “drop in the bucket” in the country’s spiraling housing crisis, experts in the field say.

Israel has “deeply rooted structural problems like a rapidly growing population and a government that controls the supply of the land — which is a very unique situation among developed countries — and these are the sources of the issue,” said Prof. Benjamin Bental, a professor emeritus of economics at the University of Haifa and the principal researcher and economics policy program chair at the Taub Center for Social Policy Studies in Israel.

“When you have a constantly growing population and a huge gap between the supply [of land] and demand that has been widening for years, almost anything the government does will be just a drop in the bucket, unless they start massively releasing land. But that requires things like changing zoning laws and construction laws, reforming municipal structures, addressing the surrounding infrastructure,” Bental told The Times of Israel in a phone interview.

In the housing plan it unveiled last week, the government set a target of starting construction of 280,000 homes over the next four years, advancing plans for 500,000 more housing units, publishing tenders for 300,000 homes on state-owned land, and having 180,000 successful such tenders. Reforms to reach those goals include reducing bureaucracy, particularly for unique housing projects — such as ones that aim to demolish old buildings to build new ones in their place — and projects that convert offices to small residences for students, for example.

The plan also aims to invest NIS 8 billion ($2.5 billion) in developing transportation, drainage, and sewage infrastructure; NIS 5.5 ($1.75 billion) in creating new kindergartens and schools; more than NIS 2 billion ($630 million) in developing, planning and removing hurdles for new homes in the Arab community; and NIS 640 million ($202.6 million) to encourage municipalities to approve construction permits. The plan was put together by the Finance Ministry, Housing and Construction Ministry, and Interior Ministry, which said that the moves would overhaul Israel’s real estate landscape, “already lowering prices in the immediate time-frame.”

Local councils are a huge hurdle to getting more housing units built, noted Bental. “Municipalities have more incentives to build commercial areas than residences because of the higher property taxes. More people costs them more money — they have to invest in the services they provide like roads, social services, schools, etc., and this issue is not sufficiently addressed in the plan.”

“There’s a huge mass of municipalities in the center [of the country] that don’t cooperate, that feud with each other, and fight for funding. Even if the government increases the supply of land, the question is will the plan be implementable without major municipal reforms?” asked Bental.

At the moment, the housing announcement is a “sideshow, it’s an important sideshow but it’s still a sideshow. The main show is the actual construction and the implementation of the plan, if it happens,” he said.

Central government and local authorities at odds

Yaron Hoffmann-Dishon, a researcher at the Adva Center, a Tel Aviv-based policy analysis center that focuses on social and economic inequality research, said there wasn’t much new in the housing plan to begin with. “The government is once again betting on saying that more land will be marketed for housing construction, but they’ve been saying this since at least 2011. We are already 10 years into this crisis. There’s just nothing new here,” he said.

He too noted that the plan faces serious obstacles to implementation, mainly because of a lack of investment in infrastructure over the years. “The Land Authority can market land all it wants but there are planning issues. Local authorities often don’t approve new construction because there is a lack of infrastructure — interchanges, sewage, public services, kindergartens and such. And who is going to pay for this infrastructure? What the government has proposed is still too little.”

There needs to be an overhaul of how the central government and local authorities work together and communicate, he said, and how the fast-track planning committee known by its Hebrew initials as Vatmal, the Committee for Preferred Housing Sites, operates.

“One of the many complaints in recent years is that neighborhoods planned by the Vatmal are lacking the proper infrastructure, most notably transportation. So you have entire neighborhoods of people sitting in traffic in their cars every morning because there are lots of high-rises but only one road out of there,” said Hoffmann-Dishon. This scenario plays out daily in cities like Harish and Rosh Ha’ayin where thousands of new housing units have been built in recent years.

Hoffmann-Dishon’s research and insight were featured extensively in The Times of Israel’s comprehensive feature last month on the rising costs of housing amid government inaction on a number of factors that affect the housing market.

The article works through some of these factors, such as the increase in the number of investors in the housing market who buy second and third homes as sources of rental income; the historically low interest rates set by the Bank of Israel that encourage borrowing; the artificially restricted supply of land, 90 percent of which is state-owned and managed by the Israel Land Authority (ILA); the inadequate amount of construction of housing units in recent decades that led to the severe shortage, and the rising inequality that puts homeownership out of reach for many people.

According to a recent study by the Alrov Institute for Real Estate Research at Tel Aviv University’s Coller School of Management, the average cost of a four-room (three-bedroom) apartment in Israel stands at NIS 2.2 million ($682,608), and the average equity required for a down payment and surrounding expenses was estimated at about NIS 840,000 ($261,140).

Housing prices have risen by about 10 percent since last year, though comparisons vary. According to the Central Bureau of Statistics, prices for new homes in Israel rose by 12.5% in June-July 2021, compared to the same period last year. A comparison of July-August 2021 shows an increase of 9.2%, relative to that same period in 2020. The government, meanwhile, argued that prices have risen by just 6.2% between December 2020 and August 2021, lower than the OECD average of 6.5%, according to a joint presentation by the relevant ministries.

“Households in Israel have a hard time affording their mortgages and it is becoming increasingly difficult for first-time buyers to purchase an apartment,” Prof. Danny Ben-Shahar, director of the Alrov Institute for Real Estate Research, told The Times of Israel last month.

‘Mostly theater’

With the new housing plan, “the government is holding onto its position as a sort of regulator and land distributor in the housing market, there is no direct involvement, no real proactive steps to make sure more housing is really built,” said Hoffmann-Dishon.

He pointed to steps taken by the government in the 1990s, for example, when authorities actively worked with contractors to build housing units to accommodate the influx of immigrants from FSU (former Soviet Union) countries. “The government released land, provided guarantees to contractors — they said they would buy the apartments contractors couldn’t sell — and that allowed them to build more freely and without constraints,” he explained.

Hoffmann-Dishon reiterated that there was “nothing new, not in the proposed plan, not in the government’s position, and not in its ideology” of generally letting the free market decide.

Bental said that “as a [land] monopolist, the government has a hidden interest in the high prices. It sells land expensively and it has a weird incentive structure to keep this policy in place because, deep down, it is a huge tax on the population and a very important source of revenue.”

“If the government suddenly decides to give this up, that would require extremely complicated reforms and a massive modification of the state budget. It is a gargantuan task,” he said.

“What the government is trying to do instead is change the structure of the demand [for housing] and that is mostly theater,” warned Bental.

Part of the proposed housing plan includes the restoration of an 8% purchase tax for second-home buyers, which had been reduced to 5% in 2020 in an effort to get investors back into the real estate market amid the economic slowdown brought on by the pandemic, and restrictions on renting homes on sites such as Airbnb which the government hopes will free up as many as 13,000 apartments for rental in central Israel.

Bental is not convinced these measures will help much, but Hoffmann-Dishon believes these are the only “positive points” in the housing plan.

“The experience shows that the purchase tax has an effect, we have seen it in previous years,” said Hoffmann-Dishon.

According to the government’s own findings, the portion of homes being bought annually as investment dwellings climbed to nearly 30% in 2015, right before the purchase tax was raised to 8% by then-finance minister Moshe Kahlon. That led to a drop of about 10% in the next few years of investors buying apartments, until 2020 when the purchase tax was reduced to 5%, after which the percentage of investors in the housing market climbed back up to over 20% in 2021.

The Bank of Israel also recently issued a guideline prohibiting the use of an existing dwelling as collateral to purchase another home.

A refusal to tackle inequality

Hoffmann-Dishon said these measures “were obvious things to do, not just because of the effect on the housing market but also from the point of view of equality.”

“Households purchasing homes for investments are mainly the upper echelons of Israeli society. They don’t pay a lot of taxes on their equity, they already have a lot of wealth and instead of putting it in the financial market — where they would pay taxes on gains — they invest in real estate,” he said.

The government, he said, appears averse to seriously addressing the rising inequality in Israel.

One way to mitigate the rising demand for housing is by building a market where long-term rentals are a viable and reasonable option for residents, but even this part of the government’s plan seems lacking, said Hoffmann-Dishon.

According to the plan, the government will provide a tax break of 5-11% for institutional investors to build units for long-term rentals of at least 15 years.

“But the details are unclear. It’s also unclear what the government would be getting in return for these tax incentives, especially if these investors set rental prices at the current market rates, which are high. It’s a good direction but it’s still according to free-market ideology. Renters need security and stability and this requires government supervision and regulation,” Hoffmann-Dishon said.

Overall, even if the government carries out its plan completely and builds the 70,000 or so housing units per year, “I don’t see how it will really affect the possibility for low-income and middle-income households to access affordable housing. Even if it solves the climbing housing prices — and no one is promising that — there are already many households that can’t buy homes, especially in the central area, at the current prices and not even at the prices of five years ago.”

“The government is still resorting to the same old solutions that have not proven themselves and is not open to different approaches that would call for more direct involvement. It would have helped if the government would stop focusing only on the rising prices and look at the affordability itself. If they had done so, they would have come up with more policy measures,” he concluded.