Reforms and Failures in the Housing Market

Between 2007 and 2016 there has been an increase of 70% in real housing prices, on a national average, along with a similar increase in the price per residential square meter in Tel Aviv. Housing prices in Israel are characterized by a decrease in prices as the distance from Tel Aviv increases, a trend which persists equally in all directions. The only other city where prices increase as the distance from it decreases is Jerusalem, and there the price per residential square meter is lower by around 25% compared to Tel Aviv. This is a well-known phenomenon which distinguishes Tel Aviv as a special metropolitan area, with higher economic value in comparison to any other location. On the other hand, the centralized planning strategy since the mid-1990s has directed the population to reside in areas far removed from Tel Aviv (the geographical periphery), yet the hub of business development is concentrated in Greater Tel Aviv, and demand for housing in this area has not declined, but actually increased in recent years.

Since the year 2000, there has been an increase in residential crowding on a national level, in terms of the number of housing units per household, however this increase has been more pronounced in Tel Aviv and central Israel. The annual increase rate in the number of households, which is around 1.8%, is not reflected in the plans for increasing the number of homes, nor is it accommodated by the actual increase in the number of constructed homes on a national average, and in Tel Aviv in particular. Furthermore, the investment in transportation infrastructures, and particularly in public transport in Greater Tel Aviv, does not match housing distribution in terms of scope and location. In the 1990s, in light of the massive immigration wave from the former USSR, the government made an impressive push to expand housing supply across Israel, which resulted in a decrease in real housing prices from 1996 to 2006. Today, the government once again dedicates a lot of effort to increase housing supply, and has prioritized the reduction of housing prices as a primary goal. We believe this goal is appropriate, since the increase in housing prices and the lack of infrastructures impair economic growth, hurting in particular the weaker strata of society and the extent of poverty.

However, actual government actions do not substantially tackle the broad failures afflicting the housing market and urban development in Israel. The flagship programs of Resident’s Price (MEHIR LA-MISHTAKEN) and “roof agreements” with municipalities are concentrated outside of Greater Tel Aviv, and particularly in the geographical periphery. There is no comprehensive, nation-wide move to provide municipal authorities in general, and those in Greater Tel Aviv in particular, a massive incentive to endorse an increase of housing supply and to invest in transportation infrastructures and public buildings, in order to improve service to residents and to match their preferences regarding their place of residence. Although the National Committee for Planning and Building Preferred Housing Sites succeeded in increasing the number of building permits on the national level, in practice the number of building permits in the central region has not increased sufficiently to meet demand, according to our assessment. Therefore, even if housing prices seem to be cooling down slightly, it appears the government does not carry out a comprehensive strategy to address the failures in the Israeli residential property market, hence this respite would turn out to be only temporary.

Pursuant to a previous policy paper (Reforms in the Housing Sector) we propose a strategic shift in housing policy, so that it would include the following components: reform in overall planning, with an emphasis on increasing supply according to the existing stock of housing units to match the existing demand in Greater Tel Aviv, as well as comprehensive infrastructure adaptation accordingly; reform in the funding of local authorities which would eliminate their dependence on funding derived from expanding employment areas, and create a positive incentive to increase the population indiscriminately; reform in the Israel Land Authority (ILA), so that land which is not planned for construction within the municipal areas of cities would be sold and/or leased to private actors and municipalities; planning and massive promotion of urban renewal throughout Israel, and particularly in the central region; management of the transportation system through congestion charges, and the promotion of communal transport as an alternative to private vehicles; comprehensive reform for urbanization of cities and villages in the Arab sector. Each of these reforms is far-reaching, and requires political and financial resources. Only a comprehensive response to the supply-side failures in the housing market throughout Israel, and especially in its central region, would ensure a long-term decrease in real housing prices while supporting economic growth and poverty reduction. Indeed, in the absence of such comprehensive response, we can expect prices not only not to drop, but also to keep increasing, since Israel differs from Western countries in the high rate of its population growth.