Israeli parents losing ability to help kids buy homes

social justice, protest, housing
social justice, protest, housing

Prof. Yaron Zelekha: “Anyone whose parents helped them buy an apartment up to six years ago is all set.”

Cottage cheese, “Milky” chocolate pudding, and even brand-name clothing are but a small element of the growing Israeli beast called “cost of living.” The main factor inflating this beast is, of course, the housing item. In a reality in which the lion’s share of a household’s income goes toward housing, comparing the price of pudding in Israel versus Berlin is nothing more than an amusing anecdote.

Nearly all the young couples that come to sales offices to buy new apartments, as well as those who buy second-hand homes, receive assistance with their down payments from their parents. In keeping with Bank of Israel guidelines, first-time homebuyers must put down at least 25% of the apartment price (people moving upmarket have to put down 30%, investors 50%). The average price of an apartment in Israel today is NIS 1.3 million, so we are talking about NIS 300,000 or more, which is financed primarily by supportive parents.

But these are probably the last remnants of a generation past - an economic reality in which parents are able to help out their children.

What are the odds that the next generation will also be able to help its children buy apartments in the future? We set out to answer the question. In order to do so, we investigated the differences between the economic conditions at the end of the 1980s and in the early 1990s, and the economic prevailing conditions today, including, among other things, average salaries, standards of living, life expectancy, and, of course, housing prices.

The findings are not encouraging. If Israel does not have a real economic upheaval - in housing prices, salaries, etc., the rate of homeownership in Israel is likely to drop drastically. Alongside this, of course, an ongoing rise in rents is expected.

Apartment prices: “In 1980, we sold apartments for $40,000, and we made more money.”

According to Central Bureau of Statistics (CBS) data, the price of an average apartment in the second quarter of 1990 was NIS 183,000. In the second quarter of 2014, the price of an average apartment was NIS 1.3 million - more than seven times what it was in 1990. And, if that’s not enough, Mizrahi Tefahot Bank (TASE:MZTF) Chief Strategist Ronen Menahem points out, “In the 1980s, they took mortgages that were not inflation-linked. Inflation was so high, that the mortgages were completely eroded. It wasn’t even worth the cost of the postage stamp for the bank to send a letter of notification.”

“Anyone whose parents helped them buy an apartment up to six years ago is all set,” says former Ministry of Finance accountant general and current Dean of the Faculty of Business Administration at Ono Academic College Prof. Yaron Zelekha, “An apartment then cost about NIS 800,000, which was equal to about 90-100 salaries. A couple, assuming both were working, could get 30 salaries from each pair of parents, take a 40-salary mortgage, and repay it easily within fifteen years.

“Today, an apartment costs NIS 1.5 million. For this, you need 160 salaries. Even if the parents give 60 salaries, you’re now short 100, not 40. In other words, you need 1.5 average household salaries to buy an apartment. Who can live on half a salary? You can’t save. Today’s kids can’t save for their kids, and their children’s situation in another 20 years will be even worse.”

Real estate developer Moshe Gindi, one of the owners of Gindi Moshe & Igal Assets and Building, who has been in the real estate market for more than four decades, emphasizes that the reality in the previous generation was entirely different: “Then, the circumstances were simple. We would receive building permits within a month or two. Today, it takes a year or two. Then, we would complete construction in fifteen months. Today, building the same building takes twice as long, and this absolutely raises apartment prices. In 1980, we sold a 5-room apartment for $40,000, and we would make much more on each deal than we do today. Today, parents have to skimp on their food budgets to help their children. Standards of living went up, expenses skyrocketed, and it’s difficult for the kids.”

Life expectancy: “Parents are living longer, inheritances are disappearing”

Time is money. This is not only true for businesses, but also for our life expectancy. Life expectancy is on the rise, and this has economic consequences for the generation of aging parents, as well as their children.

If, in the past, the parents’ generation was “lucky” enough to get a relatively early inheritance, today, members of the parents’ generation are living longer, and continuing to live in their homes, sometimes with live-in care, and sometimes they sell their homes and move into assisted living facilities, such that children’s inheritances are eroding (if there were any to begin with).

Moreover, pensions are not what they once were. “People retire in their sixties, life expectancy has risen, and parents see that they need their apartments. Nursing care costs NIS 15,000 a month. There is a close link between pensions and housing prices. If the pension situation doesn’t change, the housing problem will not be resolved. Homes are the most valuable assets for parents, as a defense against rising life expectancy, and most will use their apartments to live in, or off of, until they die. As a result, not much is left for the children,” says Netanya Academic College Dean of Real Estate Law Prof. Aharon Namdar.

Leading Israeli economist and Economic Models CEO Dr. Yacov Sheinin: “In a normal world, one should not need to leave an inheritance. Children are not meant to plan on receiving an inheritance. In the US, for example, assets are not left to children. Parents end their lives with no assets.”

Salaries: “The recession is problematic for those who bought apartments too”

Salaries are probably the most sensitive factor, stabbing at the soft underbelly of the Israeli public no less than housing prices. Central Bureau of Statistics data indicate that the average Israeli salary in 1990 was NIS 2,300, and as of the second quarter of 2014, it was NIS 9,400 (the median salary, as was recently reported, was less than NIS 6,000).

It would appear that the average salary rose significantly, but housing prices rose by almost twice as much. “Upon examination, you can see that wages in Israel maintained a reasonable rate since 2005, whereas housing prices skyrocketed,” says seasoned real estate developer Uri Dori.

Dr. Yacov Sheinin says that in 1972, he bought an apartment that cost him 60 salaries. “This was a 2.5 room apartment on Jerusalem Avenue in Ramat Gan. Our generation worked like dogs, but managed to get an apartment. Today, the number of salaries needed is double. Who can pay more than 140 salaries? Only the top ten percent, with parents who provide significant assistance. We’ve cheated a generation that has no ability to buy an apartment, and those who do will be enslaved to their mortgages for their entire lives, and will definitely be bitter that they cannot help their children buy apartments.”

Prof. Zelekha believes that the economic conditions of the market will worsen so long as the interest rate remains low. “Anyone who didn’t buy an apartment at age 30 - it’s catastrophic, but contrary to popular belief, even those who did buy apartments at this age are in bad shape,” Zelekha says. “We have to raise the interest rate in order to stop the vicious circle. A young couple that buys an apartment enjoys low monthly payments when the interest rate is low, and therefore objects to raising the interest rate. They just don’t take into account the fact that a low interest rate causes recession. Salaries don’t rise because of the recession, and they begin to lay off workers. A recession is also problematic for those who bought an apartment, and not a lot of people like to understand this. People who bought an apartment think that low interest works in their favor. They prefer to pay NIS 50 less on their monthly mortgage payment, but don’t understand that they are earning NIS 500 less in their salaries. The interest rate must rise so that the growth rate will accelerate. If the lowering of the interest rate continues, there will be more layoffs, government budgets will continue to shrink, and this bubble will burst.

“Furthermore, people in the 45-50 age range, who have not yet reached retirement age, and whose children are under 25, are in a period of savings where they are getting low interest. In other words, the savings don’t grow. Thirty years ago, the public’s abilities were broader - they were able to buy an apartment on a single salary in a two-salary home,” Zelekha says.

“This stemmed from the fact that economic growth was high, and the standard of living then was modest. Today, people work for more years, life expectancy is rising, and salaries have been eroding over the past six years. In the West, no one buys a house for 160 salaries, or a car for NIS 100,000, and they don’t pay the prices for food that we do in Israel. In our parents’ generation, economic policy was different, everything was cheaper. It’s not that the economy was more competitive than it is today, but economic policy was more determined not to allow monopolies to raise prices, and more determined to maintain a high interest rate. As a result of this, the rate of homeownership will continue to drop, and the children will start out with nothing. There is no inheritance. It is an economic holocaust for an entire generation.”

Standard of living: “A wasteful generation. There are no more savings.”

Even if we go back not so many years, we can see that, according to tax data, in 2000, average monthly household expenditure was NIS 9,749, and in 2013, it was NIS 17,600.

“In the past, we made do with little. In the 1950s, the parents’ generation didn’t even have health insurance. As a child, I didn’t expect my father to pay for my bus ticket,” says Prof. Aharon Namdar.

“Basically, it’s not enough that parents help their children with down payments to buy apartments. Because the banks give only 20-year mortgages, the children’s monthly payments are high, and parents help their kids on a monthly basis as well, which comes at the expense of their pensions, explains Prof. Zelekha. “Now, they need to withdraw money from their pensions and lower their own standards of living, in order to help their children. In many cases, children live with their parents, parents buy diapers for the grandchildren, there is no money for daycare, so the parents take care of the grandchildren, and their quality of life goes down.”

Ronen Menahem adds, “Standards of living have risen, and there are many items in today’s average basket of consumer goods that were not in the previous generation’s. People save when the incentive to do so is high. The parents’ generation had incentives to save, but the children’s generation has no ability to save. For the parents’ generation, salary fluctuations were a central factor in deciding whether or not to buy an apartment, while, for their children, the considerations are primarily of down payments, and their parents’ ability to help.”

“The standard of living has risen dramatically,” says Sheinin. “Incomes have risen, but so have consumption habits and standards of living. The standards changed. A couple that earns NIS 20,000 before taxes, even if together they make NIS 15,000 after taxes, and need to pay rent, and raise a child - they have no chance of raising enough capital if the parents can’t help. The result is that such a couple becomes discouraged, and this causes wasteful spending. We didn’t waste, because we could buy an apartment, and we paid mortgages, and there was no money left to spend. But people who know they can’t buy an apartment prefer to go out to restaurants and travel abroad.”

Real estate appraiser Adi Zvikel believes that the behavior of the young couples is also to blame: “It is impossible not to notice the culture of hedonism that characterizes today’s younger generation, compared with the frugal culture of the parents’ generation. Today, young people find money regardless of the cost of living. In the evenings, restaurants are packed with 30-somethings who spend hundreds of shekels for a meal. Despair contributes to a regime of wastefulness. If a young, determined couple exercised restraint for the past five years, with a goal of saving, and not wasting, in five years, while making rent payments, they could have saved NIS 200,000-NIS 300,000. True, this is a down payment for a modest apartment, not on Rothschild Street in Tel Aviv, but an apartment within up-to an hour’s commute to Tel Aviv for NIS 700,000. There are apartments in this price range in Gedera, Hadera, Petah Tikva, and even in Tel Aviv.

“For such an apartment, you need a down payment of NIS 200,000, and a little help from the parents. Young couples should first ask themselves how much they paid for their weddings, which can easily reach NIS 150,000 for one evening, or how much they paid to rent a wedding dress, which can cost NIS 10,000. In other words, the claim that a young couple does not have the ability to buy an apartment is untrue, and is tainted with a great deal of populism.”

On top of all this, the fact that today we send the younger generation to live far from the center, to places like Kiryat Gat, or Yokne’am, usually also means distance from parents, and their ability to help with the day-to-day raising of their grandchildren, which, of course, also costs them quite a bit of money.

Former Azorim Investment, Development and Construction Ltd. (TASE: AZRM) CEO Eitan Soroka, the veteran real estate developer, also believes that the gaps in standards of living between the parents’ generation and the children’s are significant: “The generation that immigrated to Israel between 1930 and 1950 lived modestly, frugally, and saved every penny for their children. Buying an apartment for their children was an important value for them, and the number of children then was not more than two. This is a generation that succeeded in buying apartments with mortgages that were eroded by inflation. Those born in Israel between 1940-1960 already owned apartments, because of the help they received from their parents, and they also received inheritances from their parents.

“The problem is with the generation that was born between 1970 and 1990. This is a spoiled generation that grew up in relatively comfortable conditions. It is a generation that is characterized by wasteful spending, with no savings consciousness, a generation that spends all its money on daily expenses, and therefore cannot help its children buy apartments. This generation is enslaved by loans and credit taken for buying and consumption. This generation also has no funded pensions, and the existing pensions are low. Their places of employment are also less secure than they were in the past. You also have to remember that the picture of wealth in Israel has changed, and there are young people who accumulated money, primarily in high-tech. These people warp the picture for the public, but we must remember that this is a minority that does not affect the trend.”

Published by Globes [online], Israel business news - - on November 10, 2014

©Copyright of Globes Publisher Itonut (1983) Ltd. 2014

social justice, protest, housing
social justice, protest, housing
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