Reforms in the Housing Sector

This policy paper discusses the dominant trends in the housing market, points to structural market failures which have contributed to the rise in housing prices in recent years, and proposes a reform plan in order to curb it.

First, we present trends in the housing markets: between 2007 and 2014, housing prices in Israel had shot up by around 80% in real terms. Alongside this trend, there has been growing discrepancy between the prices of residential and commercial real estate, as well as between the price increase rate in Tel Aviv and central Israel (high-demand areas) and in the rest of the country. These trends, along with other studies, suggest that the price increase is derived mainly from low supply-side flexibility of residential properties. 

Next, we outline a detailed plan for six short- and long-term reforms, which in combination are meant to increase the flexibility and significantly expand the stock of available land for residential construction throughout Israel: (1) 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; (2) establishing a new mechanism for funding of local authorities, aiming 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; (3) 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; (4) 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; (5) enhancing the productivity and efficiency of the residential construction sector through technological mechanization of the construction industry 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.