Can We Expect Housing Prices to Stop Rising?

The housing prices model developed by Aaron Institute predicts that housing prices will increase in 2021 by around 6%, in comparison to the 2nd quarter of 2020. This will raise the deviation of housing prices above the multi-year trend line by around 21%. This trend line reflects housing prices which rise at the same rate as the increase in the average standard of living of households. The deviation from the trend lined over the last decade causes an ongoing damage to households, resulting in construction of housing units far from employment hubs, traffic congestion, and increased inequality.

The rise in housing prices stems mainly from the fact that in recent years, as before, the quarterly increase in the number of new households (around 15,000 households per quarter over the last five years) is higher than the quarterly increase in the number of completed housing units (around 12,500 units over the last five years). As a results, the discrepancy between the number of constructed homes and the number of new households has increased, and the ratio between the stock of housing units and the number of households has continuously decreased, reaching around 0.92 housing units per household in the 2nd quarter of 2020. This ratio is expected to decrease by an additional 1% by the end of 2021. The decline in the number of housing units per household exacerbates household crowding, and stemming this trend requires construction of some 15,000 housing units per quarter. Stopping the price increase necessitates the building of around 20,000 homes per quarter over the next five years, throughout Israel and particularly in its central region.

Addressing housing issues requires six short- and long-term reforms: (1) Reform in the funding of local authorities centered around breaking off the dependence of local authorities on property tax revenue from businesses, encouraging the construction of housing units, and increasing competition for households among municipalities; (2) Significant expansion of the stock of land which is available for construction of housing units, unconstrained by barriers to planning and building, throughout Israel and particularly in the central region and Tel Aviv area; (3) Reassigning authority for planning and for selling land, whether it is planned for construction or not, from the Israel Land Authority to local authorities and private entrepreneurs; (4) Advancing the urban renewal scheme by streamlining bureaucracy on the municipal level, and establishing committees to evaluate the worthwhileness and added value of urban renewal projects; (5) Enhancing the productivity and efficiency of the residential construction sector through technological mechanization and incentives for short construction periods; (6) Urban planning for the Arab sector which would transform clusters of adjacent villages into a large, self-sufficient metropolitan area, thus boosting employment as well as the efficiency of manufacturing and services.