Basing Housing Policy on Long-Term Price Target
Housing prices in Israel have been steadily and consistently rising for nearly 15 years. Between 2007 and 2021, the real prices of housing units have increased by an aggregate rate of around 110%, with an average increase of around 5.4% per year. This rate of increase is higher than the long-term trend in the real prices of housing units, which stands at around 2% per year – a trend which represents an increase in housing prices similar to the increase rate of the average household’s standard of living, or of the GDP per capita. Accordingly, in the 4th quarter of 2021, the deviation of the real house price index from the trend line reached around 26%. It should be noted that over time, housing prices rise at similar rates across all Israeli cities.
In the foreseeable future, there is no end in sight to the rise in housing prices. Aaron Institute’s housing price model, which is based on current data, forecasts that over the next six quarters, from the beginning of 2022 until mid-2023, the nominal price increase will be around 8.2%, thus further augmenting the deviation of real housing prices from the annual trend line by around 29%. This price increase is inflicting ongoing damage to households which causes, among other things, an increase in inequality, construction of housing units far from employment hubs, and a high cost of living.
The increase in housing prices in recent years have been affected by the fact that the amount of housing units built has been lower than the increase in the number of households. Over the last decade, the number of additional households has been around 57,000 per year, while the number of completed units has been around 47,000 per year, thus in the course of ten years the amount of constructed housing units lagged by some 100,000 behind the number of additional households. This discrepancy between the number of constructed units and the increase in the number of households has contributed around two thirds of the price increase, and the remaining third has been due to the decrease in the interest rate on mortgages.
The policy recommended by the Aaron Institute in regard to housing is as follows: setting a long-term target for the number of constructed housing units, so that the house price index would return to the multi-year trend line which reflects the increase rate of the average household’s standard of living or of the GDP per capita. To achieve that, we recommend increasing the stock of housing units per year by around 2.5%, thereby returning to the trend line of the real house price index by 2043.
Since the current stock of housing units is around 2.6 million units, our proposed target entails the completion of around 70,000 housing units by 2025, with construction being distributed throughout Israel according to districts, as per current population distribution and particularly in the central region. If the current low rate of construction is maintained, housing prices will deviate further from the multi-year trend line.
Achieving this target calls for a comprehensive housing policy which focuses on increasing the number of housing units. Listed below are the 8 reforms which, in the opinion of Aaron Institute researchers, will increase the availability of land for housing units and mitigate price increase:
- Reform in the Funding of Local Authorities: the crux of this reform is to eliminate the dependence of local authorities on property tax revenue from businesses, to encourage residential construction, and to increase competition for households among municipalities. We recommend changing the way local authorities are funded in a manner which would encourage the development of residential and commercial real estate according to actual demand levels in the various regions. This requires changing the municipal taxation system, so that communities receive additional funding for each new housing unit, regardless of property tax revenue from businesses.
- Planning Reform: significant expansion of the stock of land which is available for residential construction, unconstrained by barriers to planning and building, throughout Israel and particularly in the central region and Tel Aviv area. Necessary operative measures in this regard include: increasing the issuance of residential building permits to a level which would meet the natural demand for the next 10 years; expanding municipal and regional committees, and setting time targets for approval of plans which meet existing planning requirements; adapting planning to match regional targets and populations, including transportation plans; encouraging construction in proximity to train station complexes, both existing and planned, along with additional commercial and office spaces; and initiating urban renewal plans accordingly. Planning committees will focus on planning criteria, and will not look into the financial aspects of housing development plans.
- Reform in the Israel Land Administration (ILA): Fast-tracking the development of privately- or ILA-owned land planned for construction, by reducing land cost; imposing tax on private land which is planned for construction but not built or under construction (including renewal complexes where tax would be imposed on entrepreneurs).
- Reform in the Incentives for Building on Land Planned for Construction: encouraging rapid construction by contractors who secure ILA tenders, similar to 1990s’ framework; encouraging rapid development of privately- or ILA-owned land planned for construction, by reducing land cost; imposing tax on private land which is planned for construction but not built or under construction (including renewal complexes where tax would be imposed on entrepreneurs).
- Urban Renewal Reform: increasing the budget of the Urban Renewal Authority, so that the level of urban renewal would achieve the annual housing unit targets in areas with high population density in central Israel, and particularly in the proximity of metro and train stations.
- Reform in the Industrialization of Construction: enhancing the productivity and efficiency of the residential construction sector (particularly low-rise construction) through technological mechanization; reducing the reliance on foreign workers; enhancing the productivity and efficiency of the residential construction sector through investment in safe, modern construction equipment (e.g., cranes), tools (accelerated depreciation), standardized construction components (updating construction standards), and the introduction of foreign companies from developed countries; incentivizing short construction periods; formulating standards for high-quality, environmentally friendly construction.
- Urbanization Reform in the Arab Sector: transforming the centers of Arab localities into urban centers; constructing higher density, high-rise buildings, including industrial and commercial hubs; providing access through effective public transportation; focusing on Arab communities along Route 6 and in Wadi Ara, as well as Bedouin communities in the Negev.
- Construction Reform in the Haredi (ultra-Orthodox) Society: expanding the construction areas designated for the Haredi public in existing cities, while improving public transportation and access among Haredi communities, as well as between communities and employment hubs. Massive urban renewal in Bnei Brak, Jerusalem, and other municipalities with Haredi population, along with the improvement of employment hubs to provide office and commercial spaces in their vicinity.