The high cost of living has been a central theme so far in this election season. Opposition parties such as Shas and the Likud blame the government for the increase in prices in many different fields.
One of the most significant price hikes has occurred in housing. In the past 12 months prices jumped by an astonishing 17.9%. Housing purchases are not included in the Consumer Price Index, since they are considered investments – and therefore stand as an independent electoral issue.
The most prevalent explanation for the hike has been a dearth of construction starts in 2020 when COVID-19 hit, which led to insufficient supply during the past year.
Likud leader and former prime minister Benjamin Netanyahu was in power then, and therefore the Likud’s campaign, as well as Shas’s, has focused more on the price of goods and utilities.
But in a campaign video published on September 19, that changed.
In the video, Netanyahu, equipped with a graph on a Bristol board, shows that housing prices remained stable, and even slightly decreased at certain points between 2016 and 2019. The graph labels these years as being under “stable government.” Beginning in 2020 there begins a steep increase in costs, which in 2022, under what the graph deems as the “Gantz-Lapid’” government, reaches record heights in terms of yearly increase.
What did Yesh Atid do in response?
Yesh Atid responded with its own video two hours later. It began with the words “Storytelling Festival,” and then showed a clip of Netanyahu from an unknown date, promising that young couples will be able to buy apartments for under NIS 600,000. It then shifts to newsreels showing that during Netanyahu’s tenure between 2009 and 2021, housing prices rose 130%.
“For 12 years, Netanyahu has been telling us fairy tales. But in reality, Netanyahu deserted the housing market,” the video claimed.
With the election nearing, what should voters look out for when comparing the performances of the Netanyahu governments between 2009 and 2021, and the “Change Government” of 2021-2022?
Even before looking at the actual data, there is the fickle matter of price expectations, which also influence the market, according to Prof. Danny Ben-Shahar, director of the Alrov Institute for Real Estate Research and faculty member at the Coller School of Management at Tel Aviv University.
“I think that both governments did not handle the situation sufficiently, or at least in the recommended way in the long run,” Ben-Shahar said. “I can say that at least from the beginning when they took charge, each of these governments handled the situation differently. [Moshe] Kahlon was the finance minister at the time, and raised this flag from day one – that he was going to take charge of the housing market.
“Just by doing so, just by stating that this is something that he is taking under consideration, was a very good sign that helped calm and cool the market. A very basic factor in economics, and in the housing market in particular, is expectations,” he continued. “Nobody would rush to buy an apartment if they expected prices to come down. Then demand decreases and the prices indeed come down.
“This what we call a self-fulfilling expectation,” Ben-Shahar explained.
Kahlon’s approach worked, and between approximately 2017 and 2019 prices stabilized – they did not decrease significantly, but also did not rise.
“Without taking any steps, or judging any of the steps that were implemented by Kahlon, which were very arguable, I’m saying that then it was very different than what the current government did when it took charge,” Ben-Shahar said.
Prices had stabilized for a short period when the government took charge in June 2021, and, according to Ben-Shahar, the government did not immediately make it a top priority.
“In fact, I even recall that they said that prices would increase by 7%, and that already fueled new expectations. This rebuilt expectations for prices to rise again. I think this was a huge mistake. When a minister comes and says that prices will increase by 5-10%, this already generates new sets of expectations.”
In this respect, then, the Netanyahu government of 2015-2019 got the beginning right – and the current government, with Finance Minister Avigdor Liberman and Construction and Housing Minister Ze’ev Elkin in charge – did not.
What changed?
However, after Liberman and Elkin got down to business, a change began to emerge that served as an improvement over the previous governments. It had to do with supply. With Israel’s population growing by 1.8% every year, the highest growth rate in the Western world, experts agree that at least 60,000 apartments need to hit the market every year. If not, supply will not be enough, and prices will rise, Ben-Shahar explained.
“The government in the past year finally understood that the issue of new supply is the most important factor. To my understanding, and we will have to see this in the future, new housing construction was increased dramatically in the past year, and the government continues to increase marketing new land to generate more construction in the future.”
This is necessary even to meet the 60,000 units needed to accommodate for regular growth, without taking investors into account, Ben-Shahar said.
BEN-SHAHAR STRESSED, however, that there are a number of additional factors at play.
One of the most important is the interest rate, which hovered just above zero since 2015, but since April has risen to 2% in order to fight inflation.
Low interest rates means that buyers can take out comfortable mortgages – which encourages demand. The rise in the interest rate could help suppress this and cool the market. However, the rise in interest also has the opposite effect – it disincentivizes contractors from amassing the capital necessary to develop new housing, since they need to pay enlarged returns on their loans. The rise in interest thus suppresses supply in the short term – but eventually helps suppress demand in the long term, Ben-Shahar explained.
This factor, however, does not depend on government policies, since the interest rate is set by the independent Bank of Israel. Ben-Shahar thus pointed out a common misconception.
“The government, as a monopoly over the market, has an important role to generate supply – to set the conditions in which supply can be [sufficient], but not directly to control prices in any way.
The government controls supply, but not the price – and this is important to remember, as sometimes a rise in supply takes time to affect the prices on the free housing market.
“People on the news seem to be saying that the government’s role is to decrease prices. But this means to control the price, and this is not the government’s role in any way,” he said.
HOW, IN that case, did the government go about raising supply over the past year? And did this compare to previous governments led by Netanyahu? The Jerusalem Post spoke to Elkin in order to receive an answer.
Elkin, who holds a BA in math and is a famously good chess player and strategic thinker, rattled off the data without hesitation. He also clearly and concisely laid out his worldview on housing. What he argued, in short, was that Kahlon was successful in stabilizing housing prices, but that once he left in the beginning of 2020 and former MK Ya’acov Litzman took over the issue of housing prices as housing minister, the situation deteriorated dramatically – and led to the price hikes we are seeing now.
“I think Kahlon deserves a lot of credit, because most of the tools we used are similar to what Kahlon did, while implementing lessons on certain topics. But in the end, we are building on the infrastructure he built, so I actually give him credit everywhere. He achieved great things in his time. The problem was that once he left, they did not continue this policy, and therefore the State of Israel went backward,” Elkin said.
This did not happen by chance. Litzman chose sectorial bonuses and benefits over the public good, Elkin charged.
“It’s not that they [the policies] didn’t continue; they were canceled,” he said. After bringing back and improving on many of the policies, he added, “the only thing that scares me is that someone, God forbid, will enter the Housing Ministry with a sectoral orientation, as happened with my predecessors, and then the plans for the general public will be canceled.”
Here are the data
Here are the data, which Elkin recited by heart:
The peak number of housing units that hit the market in a year, prior to his tenure, was 70,687. This was under Kahlon in 2018. In 2019 this number tanked to 56,340, and in 2020, when Litzman took over, it fell further, to 50,600.
Under Elkin in 2021, that number reached 101,595. And so far in 2022 over 60,000 units have been marketed, and between 85,000 and 100,000 are expected by year’s end. Elkin said that when he took office he said that his goal for 2021 was 70,000-80,000, and everyone laughed.
More marketed units mean more supply, which pushes down prices. But this is a process that takes time, Elkin said.
Other than marketing, another problem in Israel was a logjam of construction starts. Here, too, Elkin raised the bar: In 2019 and 2020, between 55,000 and 60,000 constructions began. In 2021 that number hit 63,000, and at the half point of 2022 the yearly number was already at 40,000. This is a rate that has not been seen since the days of former prime minister Ariel Sharon in the Housing Ministry in the early ’90s, Elkin claimed.
Asked how he explained his success, Elkin described a chain of causes that led back to the biggest problem of all: political instability.
There are many housing projects that are waiting for regional authorities to begin construction. However, these projects need vital infrastructure, which is under the state’s responsibility. The state, however, was without a national budget in the last Netanyahu years, and could not procure the necessary funding to build this infrastructure. This caused a logjam, and the first thing Elkin demanded in the national budget that passed last year was sufficient funds to unclog the system.
Mayors, though, prefer to build office buildings and not homes, since they pay more city taxes. Elkin created incentives in order to change this and, along with senior members of his ministry, came to agreements with dozens of municipalities.
ANOTHER THING that Elkin did was significantly increase the number of housing units being sold at discounts, with the cost being picked up by the state. Here, too, the numbers were high under Kahlon, and then tanked: In 2018 there were 19,600 discounted units that were offered to young couples via lottery. In 2019 this number dropped to approximately 8,000, and in 2020 it sank to 3,400. In 2022, according to Elkin, the number has passed 20,000 and is expected to pass 30,000 by the end of the year. In 2023 there are scheduled to be 45,000 discounted housing units. With 120,000 couples signed up to the lotteries, within a year and a half nearly two-thirds will be given the option to buy an apartment at a heavy discount.
How heavy? The contractors are required to sell the units at 2020 prices – before the steep hikes of 2021 and 2022. On top of that, they are required to offer an additional 20% discount. These will be funded by the state, as it will be selling land to the contractors at a similar discount. The program will cost the state billions of shekels, and Elkin faced stiff opposition from the Finance Ministry’s Budget Department. But he eventually managed to bring Liberman on board.
“My argument was very simple. I argued that the increase in prices stems from the fact that the state did not market enough and did not plan enough, so there is no reason for the state to enjoy profits over taxation of the increase in land prices because of its own failure. It must pass this money on to the young couples,” Elkin argued.
However, the facts are unavoidable: The prices jumped nearly 20% with Elkin as housing minister. His explanations are plausible, and indeed it is clear to all that policies take time to affect markets, especially when it comes to housing – and that the current price spike is due to many factors, many of which took place before Elkin joined the government.
But Elkin knew that the prices were going to rise this when he took office, he said.
“When I began my job and I saw what a big gap there was in housing units hitting the market. It was clear to me that there would be a very big increase in prices in the first year, and even in the years after. And I also knew that all the steps I would take would affect the market probably only after a certain period, save for the discounted apartments, which had an immediate effect on young couples. The impact on housing prices is a process that takes time. For Kahlon it took three years. Such shortages take several years to fix, and you have to stick to the policy,” Elkin said.
“Then there are two options. You can either give up and deal only with short-term plans, in painkillers, or invest in something that, if they had invested in it before me, we would not have reached such an increase in prices – even if, in the end, the one who reaps the political profit will be someone else. In such situations, I advocate what is right and not only what will bring political profit in the short term. And so I consciously chose to go in the direction of hard work, in order to increase the numbers [of marketed apartments] – even if, in the end, I won’t be publicly or politically reward for it,” Elkin concluded.
The bottom line is that governments under Netanyahu enjoyed successes in stabilizing housing prices in the past, and the current government looks to be on the right track. Both got some things right and some things wrong. The real problem, at the source of so many other problems, is that Israel is heading to its fifth election in three-and-a-half years – and long-term planning has become nearly impossible.