Burst the housing bubble now

Dror Marmor

Instead of initiating another lost decade and falling home prices (prices fell 22% in real terms in 1998-2007), it would be better to slash prices all at once.

"The Likud government will solve the housing bubble. The situation in which it takes 8.2 years of work to buy an apartment will change during my term, and apartments will be affordable by all young couples." The speaker was Benjamin Netanyahu on the eve of the elections for the 14th Knesset in 1996, in which he was elected prime minister for the first time.

Home prices rose 16% that year (and 9% in dollar terms). A five-room apartment in Ramat Gan already cost over NIS 1 million ($295,000), and the nation cried out. The amazing thing in the historical incarnation is that Netanyahu succeeded. Home prices fell 10% in dollar terms in 1998-99, the trend was clear. But instead of reaping the rewards, Netanyahu was ousted in the 1999 elections in favor of his close friend, Ehud Barak, then chairman of the Labor Party. Summarizing Netanyahu's first term as prime minister, "Globes" wrote, "Falling prices and bankruptcy: the term of Prime Minister Benjamin Netanyahu, who held the housing portfolio, is a term of crisis and severe slowdown in the real estate market." The market was frozen, contractors went bankrupt, tax revenues shrank, and tens of thousands of people lost their jobs, without anyone being comforted by the drop in home prices in real terms.

It is very important to remember this grim history. It is not only the job of Netanyahu (and of Yair Lapid and Naftali Bennett) or Governor of the Bank of Israel Prof. Stanley Fischer's banks which are liable to be undermined by falling home prices; this is a real worry of any economy. Talk of a gradual decline should worry the nation's leaders even more. Who will buy an apartment today if he is guaranteed a cheaper apartment tomorrow? Who will buy tomorrow, if it is better to wait for the day after tomorrow?

Nonetheless, and maybe just as was the case 14 years ago, the new government has apparently realized that there is no choice: since there is no chance for a young couple in 2013 to obtain the minimum equity needed to be enslaved to a mortgage to buy an apartment; because it now takes 11 years of work to buy an apartment (131 average salaries, according to the latest survey, with no chance of salvation coming from higher salaries); because just last Friday, the Central Bureau of Statistics reported another 1.7% rise in home prices in January, completing a 77% rise since mid-2007; and because economic cycles at some point will do their thing.

The housing shortage is the government's number one problem, even if the solution will have to come at the expense of harming the soundness of banks and thousands of businesses and workers who have made hay in recent years from the inflation of the housing bubble. It is better to know that the wheel must turn, and to take preemptive action.

Maybe the fact that Moshe Kahlon is still in the picture, and his appointment as Israel Land Administration chairman was included in the coalition agreement should remind us of the advantages of a quick fix. Instead of initiating another lost decade and falling home prices (prices fell 22% in real terms in 1998-2007), it would be better to slash prices all at once.

In the mobile market, Kahlon conceded billions of shekels to completely change the competitive map. In 2014, Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) paid NIS 1.4 billion to acquire frequencies, while new carriers HOT Mobile Ltd. and Golan Telecom Ltd. received them from Kahlon for almost nothing (on the condition that they met the customer threshold within five years). In the same way, just imagine if Kahlon were to give away large tracts of land for nothing, or almost nothing, on the condition that developers build thousands of cheap apartments on it within a stipulated number of years, at the expense of tycoons of the previous generation, instead of giving a few hundred or few thousand happy families an apartment at a discount.

As for the people who bought a home at the old prices - tough luck. They will go on paying their high mortgages, just like the tens of thousands of Israelis still stuck with the mobile carriers' old rates. At least their children and siblings will be able to buy an apartment at a sane price.

Published by Globes [online], Israel business news - www.globes-online.com - on March 17, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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