Treating the symptom rather than the disease is not generally good medical policy. It is also not good economic policy. Then why is Israel’s government going down that road?
Israeli housing prices have risen in excess of 5% annually since the early 2000s, with price increases occasionally reaching double digit percentages, especially in the central region. Recently, Bank of Israel Governor Prof. Amir Yaron joined the chorus calling for a tax on housing investments as a way of moderating the rise in housing prices. The call is disingenuous, given that a major culprit in the rise in housing prices is the Bank of Israel itself.
Housing prices rise and fall in the opposite direction to interest rates. As an economist, Yaron is well aware of this. Following the Great Recession in the US and its impact on European economies, central banks of developed economies reduced interest rates to near zero with the goal of reducing the cost of funds to businesses. Israel followed suit, with the expectation that, with cheaper money, businesses could continue to survive and even expand, keeping unemployment low. At the time, there was discussion in Israel about the impact of lower interest rates on property prices, but the concern about employment overrode that - and rightly so.
The Great Recession ended in reasonable time (18 months), but interest rates remained near zero. Around the time that central banks began talking about raising them back to pre-recession levels, COVID-19 came along and renewed concerns about the economy overall.
All of this is understandable. Beating up on investors in the housing market, however, is not. The official concern is with the ability or inability of young couples (first-time buyers) to buy a home. If a four room apartment costs NIS 2 million (about $610,000) in the Tel Aviv area, the current down payment requirement of 25% is NIS 500,000 ($153,000). If prices rise 5% in a year, a young couple will need to come up with an additional NIS 25,000 ($7,600) for the down payment. Most young couples do not earn enough to save an additional NIS 25,000 in a single year, hence the problem.
In August 2011, then Minister of Finance Yuval Steinitz accused investors of driving up housing prices so that they could profit from rents. Later, Moshe Kahlon, as minister of finance, attempted to impose a tax on multiple properties owned by the same investor. Investors became the favorite whipping boy of Likud-led governments.
The error in this discussion is the focus on young couples buying an apartment. Meanwhile, 35% of Israelis (including young couples) rent . Apartments for rent are in short supply and expensive, especially in the country's center. There is little concern in Israel's political and economic leadership about this shortage. Instead, they seek to exacerbate the situation by punishing those investors that supply rental apartments to the market.
To date, there is no organized rental housing market in Israel as there is in the US and Europe. That is, most rental properties in Israel are apartments bought by investors who finance them with a mortgage, hold them for three to four years, and then sell them to capture the capital gain. In the interim, they rent them out to cover the mortgage payment. This is the housing supply for 35% of our population. And our leadership wants to punish those supplying these apartments and simultaneously make the apartments even more expensive for those unable to buy.
It is important to note here that returns on rents are low. That is, the return to the investor on rental property is around 1-2% per year, making holding a rental apartment for an extended period of time unattractive. The business model in Israeli real estate is to buy and sell for the capital gain, not the rental cash flow.
That same political leadership is also to blame for the high cost of housing. Per the government's own estimates, Israel needs about 55,000 new apartments per year to keep up with demand. But the government, via the Israel Land Authority, is the country's monopolist in land and only releases enough land to build about 50,000 units per year. This has the effect of driving up bids for land, which fills the government's coffers.
Similarly, the government sets the zoning laws that determine how many apartment units can be built on a particular property. Instead of zoning land for taller buildings and more units, it zones for lower density: again driving up the price of homes and with them the price of land.
Both the Bank of Israel and the housing authorities need to encourage investors to build rental housing as well as homes for sale. The high rents are one of the drivers of the push to buy one's own apartment. A larger rental supply will reduce pressure to buy, and with it reduce upward pressure on housing prices. In the US and Europe, tax benefits are used to encourage investors to provide rental units, while tenant protection laws protect tenants' rights. This is the business model that Israel should be following.
Yes, investors contribute to the demand for apartments, but they are not the cause of rising prices: government policies are. It is time to treat the disease and not the symptoms.
The writer teaches marketing and management at the Jerusalem College of Technology, and is deputy chairman of the Business Administration Department at Touro College Israel, where he teaches finance.
Published by Globes, Israel business news - en.globes.co.il - on August 1, 2021
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