State’s inability to fix the housing crisis leaves many out in the cold

The gap between the haves and the have-nots in Israel has grown substantially wider over the past decade, stemming from the fact that for two-thirds of Israeli families, their main asset is their home.

The good news is that since the 2008 real estate slump, the value of these properties has soared some 130 percent — more than anywhere in the West. This is an impressive value hike, certainly for an asset as conservative as homeownership, making real estate investments far more profitable than investing in one’s pension fund.

Climbing housing prices have been especially good for those fortunate enough to own at least two homes, which is about 10% of all households. If one of those homes happens to be in an area that is in high demand, then owners are even better off — even if the majority of real estate equity is still mortgaged.

While this may sound like positive news, it leaves about 34% of Israelis out in the rain. Those families are still paying rent, the rate of which has also seen an increase, rising over 60% in the last decade, with no end in sight.

Housing prices in Israel are so high that the Paris-based Organization for Economic Cooperation and Development, which Israel joined in 2010, has warned that the Israeli housing market could see a “severe correction” in the coming years, which could adversely affect the economy as a whole.

Poverty rates in Israel are still the highest in the West — excluding the United States — and the nation suffers from high inequality gaps, as measured by the Gini Index, which gauges income distribution in the population. These gaps are compounded by the fact that some are born into a real estate-sound home and some are not.

Ethiopian Jews rallying for housing equality on June 26, 2017. (Yonatan Sindel/Flash90)

Much of this capital has been inherited and has naturally made the heirs’ lives more financially secure. But the gaps in housing capital in Israel actually create multi-generational inequality that is expanding at an ever-increasing rate.

This is because the top income decile has accumulated more than NIS 3 million (roughly $852,000) in equity from the apartments they own – 7.5 times more than the lowest-income decile, which accumulated only NIS 400,000 ($114,000) in equity.

“Young people who have an inheritance manage to buy an apartment at an earlier age. They live in a better location and can afford a better education. As they don’t have to spend all their money on housing, they have a better starting point [in life],” Yaron Hoffmann-Dishon explained to Zman Yisrael, the Hebrew sister site of The Times of Israel.

Hoffmann-Dishon is a researcher with the Adva Center, a Tel Aviv-based think tank that monitors social and economic developments.

A private home in Jerusalem’s Talbieh neighborhood. (CC-SA/ Dr. Avishai Teicher)

The high home ownership rate in Israel is not necessarily economically viable, he continued, offering as proof the fact that countries such as Austria, the Netherlands, France, and Denmark — where there is a more equitable distribution of wealth and therefore a lower poverty rate than in Israel — have lower home ownership rates.

In Germany, for example, only 50% of households own their homes, though the standard of living in Germany is certainly not lower than its Israeli counterpart, he said.

“The current housing reality perpetuates and even adds to inequality,” Hoffmann-Dishon said. “The home ownership rate is very high simply because there is no other solution. This doesn’t indicate economic prosperity in and of itself, rather it’s a characteristic of the housing market.”

“What stands out in Israel is that there is no alternative. You have those who manage to buy an apartment and those who don’t, and they are forced to rent in the private market, which is unstable. Locations that are in high demand have poor supply, abuses and other characteristics of an unregulated market,” he said.

Illustrative: Young Israelis sleeping in tents on Rothschild Boulevard in Tel Aviv in protest of high housing prices, August 10, 2011. (Liron Almog/Flash90)

‘The solution lies with reorganizing the housing market’

Taxation or public housing schemes could reduce the rapidly growing real estate wealth gaps, affording everyone a more equal opportunity. The latter solution can be achieved with a relatively broad consensus, while the notion of raising taxes usually sparks dread among politicians and the public alike.

So far, the government has only compounded the problem by encouraging the obsession with home ownership via its lottery-based Buyer’s Price affordable housing program, introduced by Finance Minister Moshe Kahlon in 2016. The plan has backfired, failing to deliver on promises of rapid construction and skewing in favor of the more affluent social echelons, who are the only ones who can afford to enroll in lotteries for the more expensive apartments offered in central Israel.

The flip side of real estate wealth is what we call the “housing crisis,” manifested in the way most Israelis overextend themselves with respect to household expenditure on rent or mortgage payments: the lowest social decile spends 62% of its income just to keep a roof over its head. The middle class fares only slightly better, spending a third of its income on housing. The bottom line is that neither demographic has enough left to live on.

Hoffmann-Dishon argues that the solution to the housing crisis and the inequality it fosters begins with reorganizing the housing market so that it includes more long-term affordable housing.

Finance Minster Moshe Kahlon tours a Buyer’s Price construction site in Jerusalem. (Hadas Parush/Flash90)

“Our proposal is based on what has been done in several advanced countries and entails increasing the state’s involvement in a way that ensures that the housing industry is not based solely on the private market, and also ensures that [the housing industry] builds, sells and rents out apartments alongside public bodies doing the same,” he explained.

According to an Adva Center position paper titled, “The Public Options for Housing,” purchasing apartments in central Israel is a privilege reserved solely for the top echelon, and the private rental market only transfers wealth from poor households to affluent ones.

“This issue has become a key factor in shaping the map of social inequality in Israel,” the paper asserts.

Only 2% of Israeli households live in public housing. In contrast, in Western Europe, where poverty rates are lower, public housing serves between 17% and 32% of the population. The Adva Center proposes to create a pool of 450,000 public housing apartments, which will make up half of the rental market at any given time.

Even Yesh Atid leader Yair Lapid, a diehard capitalist, understood change had to be made. In 2014, while serving as finance minister, he formed “Apartment for Rent,” a government agency seeking to promote public housing, including long-term rental apartments, within the framework of the National Housing Project. His successor, Kahlon, vowed to keep the project going, but went on to invest billions of shekels in his own affordable housing program, which has so far produced merely a few hundred long-term rentals.

Illustrative: A huge 2013 election campaign sign reading ‘Bibi – Housing for the Wealthy. Shelly – Housing for Everybody’ posted by the Israeli Labor Party underneath the Holyland complex in Jerusalem, a controversial luxury development that some estimate remains 40% to 60% empty during much of the year (photo credit: Flash90)

Hoffmann-Dishon noted that for Israelis, “the term ‘public housing’ evokes the image of run-down apartments for the poor, but that’s not how it is in the rest of the world. Public housing for the middle class – even at cost, with no subsidies – can be revolutionary for families that cannot afford to buy their own home.”

“We can’t suffice with solutions that only address housing ownership. The architects of Buyer’s Price know that the program only appeals to the seventh and eighth [social] deciles, meaning it fails to meet the needs of the lower half of the social echelon,” he said.

“The government approved the expansion of public housing offerings, and Housing Minister Yoav Gallant tried to promote that under a plan dubbed To Live in Dignity, but the majority of politicians assume housing must be based on a free market, so they’re reluctant to embrace the notion of public construction and ownership,” said Hoffmann-Dishon.

Still, a shift is evident among public and government officials. Former Housing Ministry director-general Haggai Reznik, who in 2018 presented the findings of the ministerial committee tasked with exploring the feasibility of the To Live in Dignity plan, said the panel’s chief recommendation was to increase the public housing pool by some 72,000 homes per decade. It additionally recommended plans for construction earmarked for long-term rentals, making more state land available for public housing projects, and offering incentives for urban renewal projects that include public housing.

Illustrative: A housing construction site in Jerusalem, October 27, 2013. (Yonatan Sindel/Flash90)

Reznik resigned when the Treasury refused to translate these recommendations into an actual budget.

There is also public demand for this type of solution, certainly in central Israel. In Tel Aviv alone, thousands have applied for the rent-controlled apartment lottery, despite the fact that it offers only several dozen apartments with a short, five-year rental guarantee.

A question of funding

With budget cuts looming in an attempt to rein in the national deficit, which has surged to NIS 14 billion ($3.9 billion), or 3.9% of the gross domestic product, it is unlikely that Finance Ministry officials will change their minds anytime soon regarding the urgent need to fund public housing projects.

There is another way to reduce wealth gaps, which can also help channel funds directly to affordable housing projects — namely imposing one of two taxes: an estate tax levied on the deceased’s assets as a whole, or the slightly more cumbersome inheritance tax, which is levied on the funds each successor receives.

But to say this is an unpopular option would be a gross understatement.

Economist Tal Wolfson has found that imposing a relatively minor tax of just 10% on estates worth NIS 2 million ($568,000) or more would yield the government NIS 3 billion ($852 million) in annual revenue.

Tents set up on Rothschild Boulevard in Tel Aviv. Fed up with high housing prices around he country, hundreds set up tent city, vow to stay until government presents a solution. August 1 2011.
(Photo by Yossi Zamir/Flash 90)

Israel enacted an estate tax in 1950 but repealed it in 1981. The issue was broached again in the early 2000s by the Ben-Bassat committee on tax reform, which recommended imposing a 10% tax on estates worth NIS 2 million and over.

The committee further suggested taxing cash gifts of NIS 50,000 ($14,000) and higher, to discourage the “giving while living” practice, by which parents transfer wealth to their children while they are alive.

An estate tax is imposed in most Western countries — including the US — ranging from 10% to 20% and higher. Ben-Bassat’s proposals, however, were shelved, and it’s hard to see any of today’s politicians rising to the challenge of pushing a reform that makes their electorate shudder.

Worldwide momentum

Estate and inheritance taxes have recently been gaining momentum worldwide and have been proving very effective.

The British Economist magazine recently estimated that the inheritance tax’s “comeback” stems from the fact that the Baby Boomer generation is starting to die off, having accumulated enough wealth to make estate tax applicable.

This wealth was accumulated in part thanks to the accelerated rise in real estate value in the UK since the 1970s, and in Britain, like in Israel, real estate is the main asset parents will to their children.

Israeli social activists protesting high housing costs near tents on Rothschild Boulevard in Tel Aviv on March 1, 2015. (Tomer Neuberg/Flash90)

It also bears remembering that the past few decades have been very good to equity, which has grown far faster than the average wage. This stems from a global tax system that is more lax with capital gains than wages for labor.

The main argument used by the opponents of the estate tax is that since the accumulated capital has already been taxed during the deceased’s lifetime, there is no need to tax it again.

The theory of rapid capital growth has taken root largely over the work of French economist Thomas Piketty, a superstar of recent wealth and income inequality research.

He argues that wealth at the top echelon grows three times faster than the economy. Thus, Piketty says, inheritance is the main contributing factor to one’s economic status and ability to live comfortably, certainly far more than one’s profession of choice and the work it entails.

Students protest outside the Ministry of Construction in East Jerusalem against the government’s housing policy (photo credit: Uri Lenz/Flash90)

As Israelis are averse to any policy that may impact their wealth — or, to be exact, that of the wealthy few — chances of an estate tax being reenacted in Israel are slim.

Given past experience, it’s hard to see Israeli politicians risking any political capital on controversial issues such as an estate tax.

An example of this was seen during the 2017 kerfuffle over the Treasury’s attempt to promote third-apartment taxation — a move that would have impacted only 56,000 households.

“The controversy and [political] bickering was completely disproportional,” Hoffmann-Dishon noted. “Kahlon said he was pressured by interest groups [to scrap the bill]. When they say that there is inequality there are some who forget that sometimes, you have to confront those who stand to benefit from it.”

This article has been adapted from the original Hebrew, which appeared on The Times of Israel’s Hebrew-language sister site, Zman Yisrael.