There's just one way to cut the cost of housing

Yakir Plessner

The only answer to the protesters' demands on housing is anathema to them.

The only justifiable reason for the social protest in Israel is the shortage of housing. All the same, the protesters should know that that dear housing is nothing new here, and housing costs are not currently at a peak, nor have they been recently.

The most accurate way of examining the cost of housing is to calculate how many years of disposable income - that is, income that the consumer is free to decide what to do with it takes to buy a home. The results of such an examination for the period 1961-2010 are very surprising.

The average number of years of disposable income required to buy a home, calculated over the past 50 years, is 14.4, which is very similar to our situation today. To comprehend how bad that situation is, you have to know what it's like in the Western world. In London, between 1992 and 2008, 3-7 years of disposable income were required to buy a home (for Britain as a whole the average for that period was 2.5-5.5 years).

In Canada, between 1988 and 2010, the average was 2.25-3.25 years. In the US, according to 2009 figures for the 25 largest cities, it took 1.7 years of disposable income to buy a home in Houston, and 9.9 years in San Francisco.

To understand the full significance of the data, you have to remember that it Is normally considered that not more than 25% of disposable income should be devoted to housing. Now, let's assume a family in which both parents work, and their joint income is one-and-a-half times the average per capita income. If this family spends 25% of its disposable income on housing, it will take it more than 38 years to achieve full ownership of its home. That is a fantastic situation. The peak was in 1997 (not recently, despite rising prices) when it would have taken our family 48 years to acquire full ownership.

Give the tycoons land

As can be gathered from the statistics, the problem is age-old, in terms of the time since the State of Israel was founded. The cause of it lies mainly in the fact that the land is under national ownership, and a large part of it is in the Israel Land Authority's "safe". That is to say, a large part of the land does not take part in the free-play of the market, and the supply of land is artificially restricted.

That is why on the desert expanses of Beersheva, for example, ugly tenements were built, just like those in the center of the country. The ILA simply wasn't prepared to release even desert land for more humane construction. The solution, of course, is privatization, the word the protesters hate most.

Are you frightened that the tycoons will steal the state's land and assets? Anyone who thinks that control of the economy by a handful of people is something new is simply ignorant of history. The difference is that once upon a time the economic overlords weren't tycoons, because most of them didn't own the empires they ruled. But Aharon Dovrat (Clal), Benny Gaon (Koor), Ernst Yefet (Bank Leumi), and the Recanati family (Discount Bank), to mention just a sample, dominated the economy far more than do Tshuva, Ofer and their friends today.

Egalitarian Israel

Inequality is a scare story beloved of the protesters. It's true that the Gini coefficient of inequality (the accepted measure worldwide) is high in Israel compared with the rest of the OECD. But the gap is entirely explained by the top 10%, for reasons that will straightaway become clear.

In deciles 1 to 9, Israel is close to the OECD average, and is in fact more egalitarian. The ratio of the income of the ninth decile to that of the bottom decile is 3.2 in Israel, 3.0 in the OECD, and in supposedly egalitarian France it is 9.7. Even in Sweden, the ratio between these two deciles is 4.6.

In Israel, the ratio of the income of the ninth decile to that of the fifth is 1.8. In the OECD, it is 1.6; in Sweden 2.0; and in France, 3.0. Incidentally, the inequality in the incomes of deciles 5 to 9 has not changed in Israel in the past twelve years.

This brings us to the highest decile. No, the tycoons don't play a role here. They are too few to have a significant impact on the income of a 10% slice of the population, particularly the top 10%. The real story is that those who populate the highest decile are people in the high-tech industry. The reason for that is that the weight of the high-tech sector in the Israeli economy (in GDP terms) is the highest in the world - double the OECD average.

In other words, the income of the top 10% mostly represents a return on human capital. It is important to add that in other countries too where the high-tech sector accounts for a large proportion of the economy, inequality is relatively high. Examples are Britain and South Korea.

What is amazing is that the relatively low inequality in deciles 1 to 9 in Israel exists despite the problem of the haredim (ultra-orthodox Jews) and the Arabs. The proportion of haredim in the bottom third of Israel's poor is 3.7 times their proportion of the population as a whole (according to National Insurance Institute figures).

In general, most of the claims of the protesters are based on ignorance, both of the present situation and of history. Because of that, they oppose the only way of really solving the housing problem, which is indeed severe.

Unfortunately, what has arisen from the protest is an attempt to achieve economic welfare through political short cuts, rather than through investment in the earning capacity of the people who live here.

The writer was formerly deputy governor of the Bank of Israel, and is head of the Department of Agricultural Economics and Management in the Faculty of Agriculture at the Hebrew University.

Published by Globes [online], Israel business news - - on July 23, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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