Israel’s failure to cap a surge in housing prices threatens to add a new drag on an already slowing economy.
With the International Monetary Fund warning of a possible bust, a committee including Prime Minister Benjamin Netanyahu yesterday approved proposals to exempt first-time buyers from value-added tax, and capping new home prices.
Housing prices soared 80 percent between 2007 and 2013, while wage increases trailed at 25 percent, according to the Central Bureau of Statistics in Jerusalem. The boom threatens the broader economy as people funnel more and more money into homes, said Shai Azar, a real estate analyst at Tel Aviv-based IBI - Israel Brokerage & Investments Ltd.
“Real estate prices force people to take large mortgages, and that can affect consumption,” Azar said by phone. “People will break into their savings to pay for apartments, at the expense of consumption, hurting economic growth.”
Israel’s $273 billion economy has already been clobbered by an appreciating shekel and depressed global demand that have cut into exports. Gross domestic product grew 3.3 percent in 2013, the least since 2009, and the Bank of Israel yesterday pared its 2014 forecast to 3.1 percent. Exports, accounting for one-third of the economy, rose 0.7 percent in 2013, down from 0.9 percent in 2012, 7.3 percent a year earlier and 14 percent in 2010.
Netanyahu told Channel 2 television on March 8 that his government hasn’t done enough to tame housing prices and he doesn’t “intend to neglect this front.”
Last month, the IMF warned that Israeli home prices were 25 percent above equilibrium and that there was a 20 percent chance of a recession-provoking housing bust. As home prices continued climbing, the Tel Aviv Stock Exchange’s EST-15 index of Israel’s biggest real estate companies has outperformed the broader TA-100 index since early last year.
In Israel, the state owns 93 percent of the land and leases it for construction. The Bank of Israel, which introduced new restrictions on mortgages after rate cuts made homebuying more attractive, has urged the government to boost supply.
“There’s an enormous amount of red tape to cut before you can even dream of creating enough supply,” Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc (HSBA), said in a telephone interview. Citing government statistics, he said it takes an average 13 years from the initial planning stages to delivering the keys of a finished apartment to the buyer.
Azar said the government hasn’t tackled the supply problem because the multiple government offices that would have to sign off on changes sometimes have conflicting agendas.
“They all must cooperate, and in practice, they pull in different directions and that is holding it up,” he said.
What’s more, “the government has profited nicely from the rise in prices,” Azar said. “When apartment prices went up, land prices went up, profit taxes and betterment taxes went up, and the government benefited.”
Housing costs touched off a summer of cost-of-living protests in 2011 that drew as many as 400,000 people to the streets. Hundreds pitched tents on Tel Aviv’s fashionable Rothschild Boulevard for months to dramatize their inability to make ends meet.
While initially denouncing the protests as “populist” stunts, Netanyahu eventually pledged to bring down prices. The government’s efforts so far have been insufficient, he said in his interview with Channel 2.
“You have to break the government monopoly to free up more land and build more housing,” Netanyahu said.
Opening more land to development may help construction companies such as Property & Building Corp. (PTBL) and Africa-Israel Residences Ltd. (AFRE), according to Noam Pincu, an analyst at Tel Aviv-based Psagot Investment House Ltd. “Land is so expensive that it cuts into profits even when prices are high,” he said.
Ori Greenfeld, chief economist at Psagot, said housing starts must rise to 50,000 a year to cover mounting demand, up from 44,341 in 2013 and 46,763 in 2011.
“Even if the prime minister tries to maneuver the market into building more housing, it’s going to take a long time to see results -- at least five years,” Greenfield said.
IBI’s Azar estimated there is a current shortfall of 80,000 housing units. With annual demand at 40,000 to 45,000, 50,000 to 60,000 homes will have to built in each of the next three to four years to bridge the gap, he said.
One of the measures approved yesterday, promoted by Netanyahu, would cap prices for some new construction at 20 percent below the end-2013 market median by subsidizing land costs. The other proposal, by Finance Minister Yair Lapid, would exempt some first-time buyers from the 17 percent VAT. It isn’t clear how much the programs would cost.
The Bank of Israel predicted yesterday that the measures “are likely to lead to volatility in volumes of activity and in prices in the market in coming months.” Lapid said in a television interview late yesterday that prices will start to decline this year and drop “significantly” in 2015.
Lapid’s plan set off a round of high-level squabbling after it was disclosed last week. Housing Minister Uri Ariel called it “half a plan,” and Bank of Israel Governor Karnit Flug, who supports Netanyahu’s concept of a “target price,” warned that it would fuel demand.
Finance Ministry chief economist Michael Sarel quit, saying the program “is based on a superficial and inaccurate economic analysis of the real estate sector and the effects of the proposed policy on supply and demand.”
Today, seven in 10 Israelis live in their own homes, according to government statistics. With a modest, three-bedroom apartment in Tel Aviv going for about $800,000 and the average annual wage around $33,000, many young people are despairing of becoming homeowners. Some are looking abroad for cheaper housing, in some cases moving to Germany and other European nations their persecuted grandparents fled.
If the government doesn’t increase supply considerably, “it will hurt an entire generation of young people,” Amir Haik, chief economist at Union Bank of Israel Ltd., said by phone. “They need to have fair prices.”
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