Excess price levels in Israel have been consistently higher than in all other OECD countries over the past fifteen years according to the Taub Center's "A Picture of the Nation Report", which provides a statistical analysis of Israeli society and the Israeli economy as at the end of 2014. The report defines excess price levels as "the difference between the actual and the expected average price level given the level of income per capita", on the basis that higher incomes in a country generally mean higher prices. The report finds that a similar result is obtained (that is of price levels in Israel out of line with incomes) even if a shorter or a longer period is examined.
The main causes of this situation, according to the report, are "the dearth of exporters (manufacturers) for the majority of industries in the local market, and the limited number of importers in many industries due to strict policies in this area." Prices of food, housing and home maintenance have risen very steeply, while there have been modest price increases or even decreases in other industries, like clothing and footwear, furnishings and household goods.
In the period 2000-2014, the cost of home maintenance, for example, rose by a cumulative 62% in real terms; food prices rose 53%; housing rose 44%, and health services rose 39%. Clothing and footwear prices, on the other hand, declined by 28%, and furniture and home equipment prices declined by 20%. The general Consumer Price Index rose by 32% in this period, while nominal wages rose in line with the index, so that there was no rise in real wages for a period of at least fifteen years.
As for housing, the Taub Center researchers write that the rises in prices and rents outstripped the Consumer Price Index, especially after 2008, but, contrary to theoretical expectations, the rises were at different rates. Whereas home prices shot up by a nominal 60% over the period, rents rose by a little over 40%, that is, not a great deal more than the rise in the Consumer Price Index. The rise in housing prices led to a rise in the proportion of young adults who remained living in their parents' homes. The number of individuals aged 35-44 who do not own a home rose to 36% compared with 30% in 2000, while for those under 35 this proportion shot up by more than 10% to 60%.
"The lack of a market in which long-term rental is a realistic and widespread option allows prices to diverge from what would otherwise be equilibrium prices. This helps demonstrate the importance of creating a rental market in Israel," the report states.
The rate of increase in food prices, a product group not exposed to substantial imports, accelerated in the second half of the first decade of the present century. In those years, the industry also saw higher rates of profit, and the two trends together indicate a decline in the effectiveness of competition in the domestic market, the report argues.
Published by Globes [online], Israel business news - www.globes-online.com - on May 16, 2016
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