Erez was riding his bike down Tel Aviv’s trendy Rothschild Boulevard last week when he saw something that upset him.
Arriving at work, the 28-year-old manager of an upscale coffee shop shared his frustration with coworkers and patrons.
“I saw a sign that said ‘A young couple is looking for an apartment to buy in the area’,” he said in disbelief that anyone close to his age could afford to buy in a neighborhood where the average 1-bedroom sells for $430,000.
Erez didn’t need to explain his distress. He and his friends had discussed this topic obsessively over the past few years. “It’s simple,” a customer named Itai rejoined. “Their parents are buying the apartment.”
Four summers ago, Rothschild Boulevard was the epicenter of a nationwide protest that at its height brought an estimated 400,000 people into the streets. Hundreds of mostly young people pitched tents along Rothschild Boulevard protesting the high cost of housing and social inequality in general. The scene soon resembled a street festival, with guitar singalongs, public debates and even Jewish text-learning on a nightly basis. The mass protest movement was sparked when 25-year-old video editor Daphni Leef found herself priced out of the rental market in Tel Aviv, pitched the first tent, and started a Facebook group.
But four years later, both apartment prices and rents throughout the country have risen far higher. Since 2006, apartment prices have been rising at an average of 6.23 percent per year, with no signs of slowing down. Meanwhile, rents have increased by about 60% since 2008, with the figure at over 72% in Tel Aviv. According to economist Noam Gruber of the Shoresh Institute think tank, “Israel is one of the most expensive real estate markets in the world in proportion to income.”
Erez says he lives with two roommates and pays NIS 2,200 ($582) a month for rent on Rothschild Boulevard. He earns an “average salary,” by which he means a little over NIS 8,000 (about $2,100) a month. He studied psychology and economics at university and at one point started his own catering business, which he sold two years ago because the 24/7 workload was too hard. During last’s summer’s Operation Protective Edge in Gaza, Erez’s army unit was called up for reserve duty. His job was to evacuate the dead and wounded.
Erez is thinking of leaving Israel.
“The gap here between the rich and the middle class is too great. For the middle class, it’s a matter of survival, just trying to finish the month.”
Erez said the idea of buying an apartment of his own is not even on his radar.
“Today, to get a mortgage, you need something like 40% for a down payment. Let’s say I find a home for one million shekels. That means I need 400,000 shekels ($106,000) in cash, and I need guarantors.
“That’s not an amount of money that someone my age or 99% of my friends can come up with. In the best-case scenario, we’ve saved 50,000 or 100,000 shekels.”
Erez spent two years in Europe, selling hamburgers from a cart at festivals. “Life there was much easier. I had a better car, and I didn’t think twice about going to a restaurant.”
In Israel, he says, no matter how hard he works, he feels stuck in place.
Where is he thinking of moving?
The tenant’s lament
Berlin and Germany are no longer taboo words on the lips of young Israelis. The Hebrew media has devoted a huge amount of ink to the inability of young people to afford apartments, which, according to a widely cited figure, on average cost 148 monthly salaries as opposed to 76 in France and 66 in the United States.
“It’s absurd that a young person who served in the army and wants to rent an apartment will get no subsidy and no help from the government,” Knesset member Stav Shafir (Labor) told The Times of Israel. Shafir, along with Daphni Leef, was one of the instigators of the social justice protests in 2011. “If that same young person moves to Germany, he will receive protections as a tenant that he doesn’t get in Israel. It’s absurd.”
According to Shafir, apartment prices are rising because of government inaction.
“In Israel, most of the land belongs to the state, which means the state can have a meaningful impact on the housing market. The state could release land and build large quantities of public housing as well as incentivize entrepreneurs to place a certain percentage of affordable housing in every new project. That’s how it’s done in England and France.”
Another big problem, says Shafir, is that over two million Israelis live in rental housing (out of a population of 8 million) yet rental markets are largely unregulated.
“It’s a jungle. Many young people who live in rented apartments in the hope of saving money to one day buy an apartment find themselves in a vicious cycle. The rents keep increasing, they keep having to move, and they don’t manage to save.”
Shafir advocates giving landlords incentives to sign long-term rentals with tenants in which they raise rent by only a small amount each year. This would relieve some of the pressure to buy an apartment. She is also behind a proposed law to regulate the landlord-tenant relationship.
“Just as the tenant takes responsibility to pay rent on time and leave the house in good condition, the landlord is obligated to provide an apartment that is livable, as well as not overcharge for bank guarantees. I’ve heard crazy stories of people paying 60,000 shekels in guarantees for a two-to-three bedroom apartment.”
Mia Gotkine Serra, a native of London who relocated to Israel several years ago, describes her rocky relationship with Israeli landlords.
“Our last landlord knew our kids were sleeping in moldy rooms and developing asthma. He would say he was sending someone, but it was never fixed. His favorite trick was telling us we were imagining the problems, or that in Israel this is normal. Toilet seat broken? In Israel this is how toilet seats are.
“When we moved we were so excited to be shot of him and then found a lot of leaking taps, broken waste disposals and damp walls in our new place. The landlord was offended that we dared complain.”
Serra says the situation reminds her of the UK in the 1970s, before the country passed a tenants’ rights law.
“It requires reasonable notice for eviction and minimum standards of maintenance. They also need to provide certificates that gas and electrical appliances have been checked by a professional.”
How landlords compete with their tenants to buy apartments
Gruber, the Shoresh Institution economist, says that the rise in apartment prices in Israel since 2008, as well as the rise in rents, is the direct result of a spike in the number of people purchasing apartments as investments.
When Gruber talks about investment apartments, he is not referring to wealthy people from abroad who buy luxury apartments in Jerusalem and Tel Aviv and leave them empty most of the year. He is referring to the 250,000 Israelis who own more than one apartment, usually to earn rental income.
“Israel has a growing population, as opposed to some countries in Europe that actually have shrinking populations,” explains Jesse Fox, head of planning information at Israeli housing website Madlan.
“That’s because Israelis have relatively large families (3.04 children per woman). Interest rates have been very low since the financial crash in 2008, and what happens when interest rates are low is that people with money naturally go to real estate, because it produces better returns than, say, the bond market. Developers can get a loan for cheap, and people who want to buy an apartment can get a loan for super cheap. Low interest rates usually stimulate the real estate market.”
So what’s happened since 2008, explains Gruber, is that the supply of apartments has kept pace with the population, but suddenly there was a whole new group of people buying apartments and in essence competing with the young families trying to buy their first home.
These are the second (and third) apartment buyers.
But if so many people are buying apartments to rent out, the supply of rental apartments must be greater, which should cause rents to fall, shouldn’t it?
Not if the overall supply of apartments is limited, says Gruber.
“When the prices of apartments rose, many young families were forced to rent. But because they can’t afford to buy an apartment, the landlord’s bargaining power is stronger, which makes the rent higher.”
So basically the rich are getting richer and the poor getting poorer?
“True,” says Gruber. “Now that interest rates are low, the value of assets goes up and those who have assets become richer as opposed to those who don’t have assets. There is definitely growing inequality, which will continue as long as interest rates are low.”
According to the OECD, Israel is the fifth most unequal country in the world, as determined by the Gini coefficient. The only countries with greater gaps between rich and poor are the United States, Turkey, Mexico and Chile. But, Gruber said, this inequality has moderated slightly in recent years.
“In recent years we see a slight decrease in inequality in terms of income. But what this low interest rate has done is create huge gaps in terms of assets.”
Who are these second apartment buyers?
Michael Sarel, an economist with the free-market Kohelet Policy Forum, says that the people who buy second apartments are middle class and above.
“It’s not the very wealthy, because people who are wealthy don’t need to bother with apartments. And someone who is poor doesn’t have the 500,000 shekels for a down payment. So it’s people in the 6th to 9th deciles.”
According to Israeli business daily TheMarker, half of the people who buy investment properties work for the government, large banks, or insurance companies, even though these workers represent only 33 percent of the population. According to TheMarker’s editor Guy Rolnik, mid-level to high-level employees of these industries are part of a privileged Israeli class he calls the mehubarim, the well-connected.
“There are two populations in Israel,” he wrote after the social justice protests. “Not left and right, not secular and religious, and not Sephardim and Ashkenazim. But the well-connected and the not connected. The well-connected are those who benefit from the economic and political status quo; they are connected to one of the centers of power and protected sectors in the country. The not connected are the rest.”
According to Rolnik, workers at the Israel Electric Corporation, where the average salary is NIS 24,000 (three times the median), are part of this group, as are workers at Israel’s ports and military industries who belong to powerful labor unions and enjoy salaries and job security that private sector employees can only dream of. Rolnik includes employees and hangers-on of Israel’s business cartels among the well connected.
“A half million to a million Israelis live well,” Daniel Doron, head of the Israeli Center for Social and Economic Progress, told The Times of Israel. “The rest are struggling for survival.”
Landlords are not to blame
But Sarel, the Kohelet economist, says the data don’t support the notion that all the increased demand for apartments is coming from those Israelis who already own an apartment and have the cash to buy another.
“The Treasury seems to think the problem is that people are snapping up investment apartments,” he says, referring to Finance Minister Moshe Kahlon, whose Kulanu party won 10 Knesset seats last March on a platform of reducing housing prices and the cost of living.
“Only one-fourth of the apartments being bought are investment apartments,” says Sarel. “Three-fourths are apartments that a family actually lives in.”
Gruber disputes this statement. Because taxes on second apartments are so onerous, many investment buyers are disguising the nature of their purchase by buying through proxies, he says.
“It’s hard to identify investors. They can buy an apartment ‘for their kids.’”
That’s why Gruber thinks Kahlon’s plan to increase taxes on purchases of investment apartments won’t work.
“It’s the right direction. But I think instead we should be taxing income from rent. It’s an accepted practice the world over. The anomaly is Israel, which has a high exemption from taxes on rental income.”
‘There is no housing crisis’
But according to Sarel, “There is no housing crisis. People aren’t homeless.”
What’s happened in the last seven years, he says, is there’s been enormous growth in the demand for apartments — for purchase, not rental.
“How do I know this? Because the price of rent did not rise as fast. It rose a bit. If there were a problem with supply — not enough apartments to live in — then we would also see a spike in rent.”
Supporting this, says Sarel, is data about living density — the number of rooms and square meters per household.
“We see in recent years that the density went down. People are living in bigger apartments, with more rooms and more square meters. This doesn’t jibe with the explanation that there is a housing crisis and not enough apartments.”
Instead, explains Sarel, what happened is that because interest rates are low, it’s much easier to buy an apartment today than in the past. That’s because most people take out a mortgage. “Every million shekels of a mortgage costs me a lot less to pay back than 10 or 20 years ago.”
Sarel says that if, in the past, a family with a median salary could take out a one million shekel mortgage, now they can afford two million shekels.
“It’s easier to buy an apartment today than 10 years ago and much easier than 20 years ago. I’m not just talking about second apartments. It’s easier to buy a first apartment as well.”
Provided you’ve saved at least 400,000 shekels for a down payment, that is. For one million shekels, one can afford a new apartment in Afula, Eilat, Beersheba or Harish, but not the Tel Aviv metropolitan area. An average 3-bedroom apartment in Jerusalem will set a purchaser back NIS 2,375,415 ($628,000) while a 3-bedroom apartment in Tel Aviv costs NIS 3,148,852 ($833,029).
“In Tel Aviv the problem is particularly acute,” says Madlan’s Fox, “because so much of the demand is concentrated there. Almost half the population of the country lives in the greater Tel Aviv area, and Israel’s other big cities haven’t yet found a way to offer young people the same lifestyle and economic opportunities that they can find there.”
What about the statistic that it takes 150 average salaries to buy an apartment?
According to Sarel, “It’s nonsense.”
“First of all, there are a lot of families today with two salaries,” he notes. “Twenty years ago there were many fewer. So to say that once you needed 60 salaries and now you need 120 salaries is not true, because each family has more salaries. Also, income tax on salaried employees has gone down, so the net salaries are higher. Furthermore, you don’t just buy an apartment from your own capital. You take out a mortgage, and that’s much easier to repay than in the past.”
So how do you explain people’s subjective feeling that they’ll never be able to afford an apartment?
“Because the media is constantly harping about a housing crisis,” says Harel. “The finance minister (Kahlon) keeps saying there are not enough apartments and we have to build more. People hear this and believe it.”
But Sarel does see a grave danger on the horizon, which is that Israeli real estate prices are, in fact, too high.
“There is a danger of this asset bubble imploding. If prices go down too fast it can lead to an economic and financial crisis.”
The worst-case scenario, he says, is an unemployment crisis combined with falling apartment prices and rising interest rates. Then, he said, the 68 percent of Israelis who own their homes might not be able to pay back their mortgages.
What is the solution?
The government should stop intervening in the market, Sarel says. Any subsidy the government offers to new home buyers — like former finance minister Yair Lapid’s zero VAT plan (which so incensed Sarel last year that he quit his job as the Treasury’s chief economist) or Moshe Kahlon’s mehir lemishtaken initiative, which caps the final price of apartments in certain projects and awards tenders to building contractors who promise to meet that price — merely increases demand for new apartments, which inadvertently and paradoxically makes their prices go up.
“Subsidies don’t help the people who can’t afford a down payment and they just increase demand. If I know I am getting a discount, I will buy a bigger apartment,” he says.
The supply side
Everyone interviewed for this article agreed that the supply of land for new apartments was highly problematic, even if they disagreed on whether the actual number of apartments is keeping pace with the population’s needs.
“There is a huge problem of supply,” says Noam Gruber. “It takes 13 years to build an apartment in Israel. Two years for the actual construction and 11 years to get all kinds of permits.”
The very first bottleneck in this process is the Israel Lands Authority, until recently known as the Israel Lands Administration. This government body was founded in 1960 to manage the lands of the Jewish National Fund and other state-owned land (which constitutes 93 percent of the country’s territory). Its mandate is to “guarantee that the national land is used in accordance with Israeli laws and actively protect and supervise state lands.” It issues tenders that are bid on by developers who can win a long-term lease on the land and the potential to grow wealthy through real estate development.
But over the years, the body has developed a reputation for nepotism and corruption. The organization’s 500 employees enjoy generous salaries and pensions, at least at the top (the average salary, according to TheMarker, is NIS 15,000 a month while the median salary is NIS 11,900).
According to TheMarker, when the Israel Lands Administration was looking for a new deputy director in 2011, a woman named Liora Toshinsky, who happened to be a close friend of the former director, received an advance copy of the tender for the position. She then proceeded to rewrite it to match her own skills and experience. Toshinsky got the job.
Earlier this year, Israeli police interrogated a senior Lands Administration official along with an unnamed Knesset member on the suspicion that they colluded to award a tender to a well-connected real estate construction firm.
“You must realize,” explained Daniel Doron, “that a signature from any bureaucrat in the Lands Authority can be worth millions to a real estate developer.”
Another recent scandal involved former IDF chief of staff Yoav Galant, who allegedly appropriated state-owned land and added it to his property in a move that was fast-tracked by the Israel Lands Administration for unknown motives.
“They say that part of the bureaucracy in the Lands Authority is due to corruption. There are people there who don’t want to push things through without a bribe,” said Sarel. “I don’t know if these stories are true but they exist.”
But once the land is sold to developers by the Israel Lands Administration, there are other hurdles. Developers must receive building permits from the local municipality, where, once again, the right signature is worth a lot of money.
According to the most recent figures, about 60 of Israel’s 265 mayors have been under police investigation for corruption, most of it having to do with real estate permits.
And corruption is not the only problem.
“There are restrictions on municipality taxes that cause cities to lose money on new residents,” says Gruber. “Cities prefer industry and commercial projects and try to block residential building.“
“Let’s say you’re the mayor of Petah Tikva,” says Sarel. “You have the option of adding a new neighborhood. It’s just not worth your while. The new population will cost a lot of money in terms of services and education while the taxes they pay won’t cover the costs.”
Gruber wants to change the incentives of mayors as well as devolve the authority of the Lands Authority to cities. If people want to live in Tel Aviv, Tel Aviv should be built up till it has the density of Manhattan.
Sarel, on the other hand, thinks the solution is to continue to reform the Lands Administration, a process that was begun in 2009. “They must not have a monopoly. Let them put out tenders for chunks of land that are not planned — and let someone else do the planning. Then there will be more competition.“
A nation of rent seekers
If you ask Daniel Doron why apartment prices keep going up, he will point to a larger systemic problem in Israeli society. The business sector, he says, is dominated by 20 or so tycoons, who are in cahoots with corrupt politicians and powerful government bureaucrats. This causes the economy to operate inefficiently and squeezes most of the population till their standard of living is just above poverty level.
He cites a 2010 Bank of Israel report stating that “some twenty business groups, nearly all family owned and structured as pyramids, control a large proportion of public firms (some 25% of firms listed for trading) and about half of market share.”
A large percentage of Israelis wake up every morning, he says, “and go to jobs where they spend much of the day playing politics to get closer to the people next to the feeding trough. That’s why Israeli worker productivity is only 2/3 of that of American workers, and these workers don’t feel like they did anything of value.”
What Doron describes are “rent seekers,” an economic term for those close to the elite who use their political or economic clout to divvy up the existing pie for their own benefit rather than producing value and growing the economic pie as a whole.
According to the International Monetary Fund, “one consequence of rent seeking is that productive resources are diverted toward appropriative activities, resulting in a misallocation of resources in the economy. Rent-seeking activities, such as corruption and tax farming, can reduce growth by lowering overall incentives and opportunities for production and investment. Cross-country studies find that countries where corruption and rent seeking is rampant suffer from lower capital accumulation, productivity, and growth.”
Israel ranks 37th in the world in corruption according to one study, alongside Spain, Poland and Taiwan.
“This country has tremendous human capital, “ says Doron, “but the system established here during socialist days is destroying both politics and the economy. We’re losing our young people. Who will be left to defend the country?”
“There are no strong figures as to whether housing prices are causing people to leave,” says Gruber, “but it is my impression that in a globalized world, people are very aware of the opportunities outside of Israel, which include an apartment or a house.”
As for Erez, the coffee shop manager, he says about 20 percent of his friends have left already.
“Anyone who had the option, who could get visas or had foreign passports, did not waste any time. Some are living in China, a lot in the US, some in Europe. “
“I don’t want to leave,” says Erez wistfully. “The people are warm. I love it here. Israel really is the best place to live. But only if you have enough money.”