Can Kahlon halt the rise in real estate prices?

Moshe Lichtman

The construction industry is not the mobile telephony industry, and Moshe Kahlon will not find it easy to keep his promises.

Barring some dramatic turn of events, Moshe Kahlon will be Israel's next minister of finance. Other than Meir Sheetrit, who served two very short terms, Kahlon will be Israel's first Sephardic minister of finance. His chief promise in the election campaign was that he would take action to lower housing prices. This was also the main social commitment made by Prime Minister Benjamin Netanyahu, who finally accepted some responsibility for the situation, following the State Comptroller's report on the housing crisis, which was released at the height of the election campaign. The public is becoming impatient, and the ground is burning under his feet.

The situation is complicated for several reasons. The construction industry is not like the cellular industry in which Kahlon made a name for himself as Minister of Communications. The situation cannot be reversed by having a few programmers change the price of a call, following which everything follows automatically and digitally. Kahlon, who in recent years has dealt personally with a small family construction project in Haifa, knows firsthand, if on a small scale, exactly what every developer experiences in a major project.

Once again, we have a situation in which the minister of finance is not from the same party as the prime minister, and the cliche that a finance minister can succeed only if he is from the ruling party cannot be dismissed out of hand. Even though as soon as the election results became clear, Kahlon announced his reconciliation with Netanyahu, and even though he is not vengeful by nature, and does not bear a grudge, he will never forget how, without batting an eyelash, Netanyahu violated his promise (included in the coalition agreement) to appoint him chairman of the Israel Land Authority (ILA).

Ariel Sharon had to go through a great deal before the prediction that those who rejected him as IDF chief of staff would have to accept him as minister of defense, and those who rejected him as minister of defense would have to accept him as prime minister was fulfilled. Kahlon's road has been much shorter, and if he is successful, then becoming prime minister is a definite possibility for him. The problem is that if Netanyahu really gives him backing on the housing issue, and he achieves some kind of success, with Netanyahu as usual taking credit for it, Netanyahu will in effect pave Kahlon's path to his own office.

The big question is what should be done about the ILA. Given the current balance of power, in which the minister of construction and housing is responsible for ILA, Kahlon's power as minister of finance will derive from one main source: every decision by the ILA council requires the minister of finance's signature. This power is considerable, and ministers of finance have used it in the past when they did not like the ILA council's decisions, but it is a negative power that cannot be used to create and initiate. That does not suit Kahlon.

Kahlon's options

Kahlon will gladly accept Yair Lapid's legacy, in which the minister of finance chairs the housing cabinet, with even greater authority. He can do one of two things: demand that a member of his Kulanu party be appointed minister of construction and housing, and operate through this minister. He can justify this demand by saying that the terms in office of Ariel Atias and Uri Ariel proved that it is obligatory to appoint a minister of construction and housing who is above any suspicion of favoritism towards a specific section of the population. In his circle they are starting to talk about the appointment of Yisrael Beitenu MK Orly Levi-Abekasis as deputy minister of construction and housing to handle the social aspect, and especially public housing problems. She has a proven record, and it is a gesture of peace within the coalition.

The second and more likely option is to make the Ministry of Finance directly responsible for the ILA. This would not be the first time that the ILA was taken away from the Ministry of Construction and Housing. For example, Sharon took the ILA from one ministry to another, and it was given to Ehud Olmert as part of the latter's beefed-up Ministry of Industry, Trade and Labor. Ministry of Finance veterans can remind Kahlon that the ILA was born in the Ministry of Finance, where it was called the office for state property, and only then set out on its journey between ministries.

Kahlon will try to achieve the aspiration expressed in every election campaign and every period of emergency in the construction industry: to transfer the Planning Administration from the Ministry of the Interior to the minister responsible for the ILA in order to create a single agency controlled by a single minister dealing with the bulk of the industry's problems. Kahlon's special political status gives him a chance to overcome the opposition of whoever is appointed minister of the interior, and to realize this aspiration. On the other hand, he will have no one else to blame.

The plan: competition in planning, development, and marketing of land

When Kahlon repeatedly says "I will break up the Israel Land Administration (he will have to get used to saying 'Israel Land Authority', M.L.)," he knows that this is a practical impossibility - a target that requires long legislative processes and organization - time that young couples cannot afford to wait. In that case, what are the particulars of Kahlon's great plan for saving the housing market?

Kahlon's plan is based on studies conducted at the Netanya Academic College, where he served as chairman of the Forum for Leadership and Societal Reform after announcing his temporary retirement from politics. The main partners in those studies were Gal Hershkowitz, Ministry of Finance budget director until 2013, who headed Kahlon's housing plan team (Hershkowitz's influence will definitely be felt in the work and composition of department from which he retired); former Antitrust Authority director general Dror Strum; Moshe Mandlebaum, Governor of the Bank of Israel in the 1980s; and former Supervisor of Capital Markets, Insurance, and Savings Doron Shorer.

In general, the idea is to create competition in the planning, development, and marketing of land. The plan is based on putting large land parcels into the hands of a number of project management companies that will be responsible for carrying out the entire development process: authorizations, planning, and marketing of the land to developers.

Kahlon's "privatization" idea is similar to the marketing method used in the early 1990s - a "property tender in the process of planning," which was issued in places like Rosh HaAyin, Ramat Rachel, Mevo Beitar, Beer Yaakov, and Yanuv. Only two of these tenders were put into effect, and even those only after 10-13 years. The State Comptroller's 1997 report pointed out failings in this method, among other things due to the especially low bids for the land made by the tender winners, the poor quality of the plans led by the tender winners, and the pressures exerted on the planning institutions by the tender winners to add higher and higher construction percentages beyond the program.

The marketing of land using this tender method was halted following the report. It is still unclear how Kahlon intends to deal with the problems that caused the failure of the first attempt to "privatize the ILA," but the idea is to deprive the developers of the ability to pester the planning committees with demands to add housing units, while being strict about infrastructure and public amenities.

With respect to the standard ILA land marketing tenders, Kahlon is expected to advocate the elimination of minimum prices from land tenders. Another element in the plan is the prevention of land marketing by ILA in "marketing parcels" in lots for new housing in order to avoid the price increases attributed by the team to this method.

As far as the Jewish National Fund's (JNF) intention to detach itself from the ILA and sell land by itself, Kahlon has explicitly stated in the past that supervision of the JNF should be conducted with complete transparency. A large proportion of JNF proceeds from marketing land - NIS 800 million-NIS 1 billion - will be used to help solve the housing crises and for other public purposes.

The biggest problem: The banks

Kahlon will have a particularly difficult time with the banks. They can be criticized for being a cartel and for their high charges, to public applause and as a follow-up to his success with the mobile telephony market, but the banks have an essential role to fulfill in housing - they provide the financing for the contractors and for the mortgages. Kahlon can therefore be expected to lower his tone about the banks.

Kahlon's team is proposing to release the financial sector from the pressure of financing for construction by opening the market to involvement by foreign companies and foreign financing in the area of residential construction, which will cause an annual 4-5% drop in housing prices. "Once upon a time, the government manipulated bank shares in order to maintain their stability," one of Kahlon's team told "Globes," "and today it protects the banks through real estate manipulation."

In the Ministry of Finance, Kahlon will also find the "rental housing" plan initiated by Lapid - a budgeted plan headed by Uzi Levy, a manager of proven capability. The plan got underway with complicated tenders, but was only partly successful. The emerging trend is to change and simplify the structure of the tenders through the build, operate, transfer (BOT) method, in which the land is not sold, and competition between the developers is over the price they bid in rent per square meter, not over the price for the land.

Kahlon's views on outgoing Minister of Construction and Housing Uri Ariel's target price plan, which is just getting underway, are still unclear. One thing is clear: in contrast to the situation in the target price plan, Kahlon will insist on the introduction of socioeconomic criteria into housing aid plans. His people talk about looking into a return to the "reduced apartment price" track, in which contractors compete over the lowest price per apartment, with universal criteria that will prevent preference being given to specific sectors.

After all this, because any action will involve giving up some state revenue from marketing land (NIS 4-5 billion a year), Kahlon will have to find budget resources to pay for all these good things. He has not yet answered that question.

Published by Globes [online], Israel business news - - on March 19, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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