Thursday, July 28, 2011
I Protest therefore I Deserve Cheap Housing Paid for by YOU!
protests and marches over housing prices. The media are proclaiming
this a dramatic social revolution, something like those revolts in
Tunisia and Egypt. One cannot read three sentences in the newspapers
or listen to the radio without hearing pontifications about "social
justice" and "social revolt." Indeed, media commentator after media
commentator insists that "All Israelis are now leftists," because
leftism is synonymous with the quest for social justice, and Israelis
suddenly care out it. Just who told them that the leftist agenda
produces social justice is not clear.
The Left itself sees the street grumblings over housing as rescuing
it from its oblivion. Netanyahu himself has been forced to put
everything else on the back burner and concentrate on making public
relations gestures to appease and co-opt the tentsters, those bored
middle-class-yuppie kids spending their break in between semesters in
makeshift protest tents in Israeli city centers. The New Israel Fund
provided the tents.
Just what changed so suddenly to persuade so many seemingly
rational people that Israel suddenly is in a major housing crisis? I
mean, weren't housing prices also high 6 months ago? So what changed?
The answer is – Israelis convinced themselves that the cottage cheese
protests held a few weeks back are the solution to economic problems
and the only way to produce "social justice." If you make a lot of
noise, get on TV, and whine about how unfortunate you are, you can
force the political demagogues to buy you off. So why get a job and
work hard and save when you can force Bibi and his chums to provide
you with subsidized housing units at well below market prices? If
you strip away the codpiece off the set of housing "reform" proposals
that the government has been marketing, none of them actually will
bring housing prices down. All they really will do is to boost the
profit rates of insider construction contractors, those cronies of the
politicians who will get sweetheart deals on land sales marketed below
So is there really a housing crisis and emergency in Israel? No,
there is a summer boredom emergency of pampered teenagers and 20 year
Here are some inconvenient facts:
From 1997 to 2007 housing in Israel got cheaper, dramatically so!
From 1997 to 2007, nominal housing prices in Israel rose 19%, compared
with 24% for the consumer price index, which means a real price
decrease of less than 1% per year, and that was without adjusting for
the fact that housing quality is slowly increasing and units slowly
getting largely, which distorts the statistics (and means
quality-controlled housing measures got even cheaper). From 1996
until 2008, the Israeli real (inflation-adjusted) prices for housing
dropped continuously, losing about 20% of value on average. While
prices started rising fairly rapidly in 2009, by the beginning of 2011
they had essentially simply reverted to their real levels (after
adjusting for inflation), from the late 1990s. See
http://www.bankisrael.gov.il/deptdata/neumim/neum397h.pdf Oh and
measuring housing prices in dollars is highly misleading because of
the rapid collapse in the world value of the dollar.
It is true that prices in Tel Aviv are higher than elsewhere and rose
faster than elsewhere, but there are large swaths of the country where
prices have not risen at all or not by much. Sales of newly
constructed Israeli housing units were 50% higher in 2010 than in
2008. In the central (Tel Aviv metropolitan area) district they were
almost three times as high. Of course, those tentsters insisting that
living in Northern Tel Aviv is an entitlement and inalienable natural
right will not care about that. Funny how residency on Park Avenue in
NY was never considered a natural right.
During recent years when prices were rising in Israel, they rose
considerably less rapidly than housing prices in many other developed
countries. (But not the US, where prices have crashed)
High housing prices hurt some people and benefit other people. They
are obviously NOT an unambiguous curse.
The main reasons for the recent rises in Israeli housing prices,
especially in Tel Aviv, are all demand side, and demand factors are
causing the bidding up of those prices. An important reason for this
is mortgage credit, which was made extremely cheap (for a while with
interest under 3%) by Bank of Israel policy. The Bank of Israel was
concerned about employment in Israel during the global crash and
printed up lots of money and drove down interest rates. One can
debate how wise that was, but it had a strong impact on the housing
The quantity of mortgage credit in Israel rocketed up, rising more
than 50% from 2007-2011. In late 2010 the Bank of Israel started
making noises about reining in mortgage credit. They have not had
much effect to date. Loose and cheap mortgage credit allows people to
bid high prices for existing housing units and drives prices high.
Ironically, the only effective short-term policy that can bring
housing prices down rapidly is to make it much more difficult for
Israelis to be able to afford housing, and to make Israelis
considerably poorer. That is not exactly what the tentsters and the
"social justice" posturers are seeking!
In addition, Israelis are getting wealthier, and higher income and
wealth feed into the housing market and drive prices up.
Israeli salaries (not household income) rose on average about 20%
since 2005 (fluctuating from quarter to quarter), which resembles the
real rise in housing prices after 2008.
Technically on the supply side, although probably just a reflection of
the boom in housing demand, construction materials in Israel have
risen since 2004 about 25% faster than CPI.