Let’s make housing affordable

Although far from today’s standards, the housing provided was of higher quality than was common at the time. Each apartment had a bath and inside toilet. He set out to replace the poor, substandard housing with tenements designed to house large numbers of the urban poor in relative comfort at affordable rents.

He did this by founding the Four Percent Industrial Dwellings Company that was designed to generate a 4% return on the shareholders’ investment.

THE ISRAELI social scene is quite different from the poor conditions that existed in London in the late 19th century. The comparative standard of living, education and expectations of the Israeli public seeking decent quality affordable accommodation are much higher, and its demands for social justice are not restricted to housing alone. Nevertheless, the provision of decent affordable housing for rent is an essential element, and its introduction will have a downward influence on rents and house prices countrywide.

Because of the high price of land in Israel, the government made a disastrous proposal some 10 years ago, whereby a speculator who could submit the cheapest tender to build rental apartments on allocated land could buy that land at half price. Nevertheless, as we know, house prices have continued to rise. In any event, it is well to note that cheap speculative building on cheap land can result only in poor-quality apartments and slum areas. Cheap is cheap wherever one goes, something that should be avoided like the devil.

While housing is a national issue, it is in local areas that it manifests itself. So if the government, in combination with the municipalities and universities, were to follow Rothschild’s initiative, it too, could economically build affordable housing for students and the middle and working classes, without compromising ideological values.

The real solution should partially involve the private sector. Suitable state or municipal land should be allocated for rental purposes only. Designated land should not be sold to construction companies but should remain the property of the state or municipality, which should fix the rents. The construction companies should tender to build the rental apartments, which will be owned by an independent state-owned company, to which the designated land will be leased for a nominal fee. The company will issue 4% bonds to the public. The Bank of Israel should guarantee the payment.

To maintain decent standards, the building tender should require the construction companies to build the best-quality apartments within the fixed price set by the government or the municipality (not the lowest-quality).The tenders should be won by the construction companies that provide the best value for the money. By virtue of the Israeli public being the bondholders in the companies holding the properties, it will be in their interest to ensure that they will be properly managed and maintained.

Here is a simplified example of the economic considerations. Excluding land, the cost of building a 100-square-meter apartment today is in the region of NIS 600,000, which will come from bondholders who will receive 4% on their investment. A reasonable rental charge for such an apartment is NIS 3,500 per month (NIS 42,000 per annum), which is circa 7% of the construction cost, leaving a positive margin of 3% that will cover, vacancies, maintenance, management and other costs and/or rent reductions.

This is a win-win situation all round. Dormant land will be utilized, investors will get a guaranteed reasonable return on their money (particularly those, like pensioners, who are receiving little or nothing on their savings), jobs will be created, municipality taxes will be collected, the government’s current account budget will not be affected and, above all, affordable housing will be provided to those in need, safe from greed and speculators.

Let us indeed make housing affordable.

There is no need to reinvent the wheel. Just take a leaf out of the Baron’s book and proceed forthwith.