• Finance Ministry land-subsidy program may boost demand
  • Bank of Israel analyzes government steps to address shortage

Israel Finance Minister Moshe Kahlon’s plan to lower home prices risks backfiring by encouraging demand, the Bank of Israel said.

Prices more than doubled in less than a decade because interest rates have been low and there aren’t enough apartments to go around. To help first-time buyers, the government is leasing some state-owned land at discounted prices to contractors, who must sell the apartments they build there at below-market prices.

But discounts might entice people who hadn’t even considered buying a first home into the market, the central bank said in its annual report for 2015 released Sunday. The program, which is directing all state-administered land to first-time buyers, could push up prices for others as the amount of land available for ordinary developments dwindles, it said. What’s more, most of the discounted construction is taking place outside the high-demand Tel Aviv and Jerusalem areas, it said.

“The plan isn’t increasing apartment supply, it’s just changing the system for marketing state land for construction,” the central bank said in its report. “Demand may increase because households that did not plan to buy apartments will try to join the program to enjoy the benefits.”

Political Stake

The central bank’s doubts about a key element of Kahlon’s housing plan echoed criticisms other economists have voiced. Kahlon’s political reputation will rest largely on whether he can make good on his campaign pledge to deliver affordable housing, and polls show voters are losing patience. If elections were to be held today, his Kulanu party’s representation would shrink to seven seats from their current 10, a recent survey indicated.

The Finance Ministry says Israel’s housing market is short more than 100,000 apartments. In addition to other steps he’s taken to boost supply in the long term, Kahlon aims to market as much as 90,000 discounted apartments through 2017.

Fear of fanning further rises is a key reason the central bank has shied from easing interest rates below the current record-low 0.1 percent, which has been in place since March 2015. Mortgages now account for a third of lenders’ credit, a potential risk to the system if prices plunge, the central bank has warned.

The International Monetary Fund last year deemed prices about 30 percent overvalued and warned that a steep drop would suppress spending by eating into current homeowners’ wealth.

Today, a modest, three-bedroom apartment in the Tel Aviv area, Israel’s biggest population center, averages 2.84 million shekels ($740,000). The average nationwide is $360,000, according to government data, while the average monthly wage is about $2,600.

More than 69 percent of Israeli households own their homes, compared with 63 percent in other developed nations, the central bank said in its report.

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