Welcome back. It’s been a very long time since I’ve posted. I hope to go back to posting once or twice a week, learning and discussing new financial and economic topics in Israel and all over the world. So, without further ado…
Perhaps the biggest ongoing economic saga in Israel this year is the housing crisis. The Israeli housing crisis, more than any other economic story this year, epitomizes the showdown between market forces and the practical needs of the people. It echoes what governments all over the world (specifically America and Europe) have been telling us for the past four years: the market is broken (even if they broke it…) and an alternative solution is necessary in order to ensure a proper way of life.
The Israeli government has tried to address this problem, but to no avail. Even with government stipulations demanding that affordable apartments be built and that committees find new solutions still, the overwhelming majority of Israelis cannot afford to buy an apartment. This should be no shock to anyone who has taken economics 101. Building a couple of hundred affordable apartments will only make clear that there is a tremendous shortage, and government committees have a long and proven track record of solving nothing.
Let’s get down to the details: According to this article in Ha’aretz, any mortgage payment that equals more than 30% of a workers pay is considered too expensive. Unfortunately, the article does not mention the length of the mortgages in question (you get more for a 30 year mortgage than a 10 year mortgage), nor the specific locations that are too expensive (hint: housing in the Galil is cheap!). Most importantly, the article doesn’t answer the most obvious question: If no one can afford a home, who’s buying them? It seems like the restaurant about which Yogie Berra remarked “no one goes there anymore, it’s always too crowded.”
According to my observation (read: I don’t have the money nor time to do an academic study, but this is what I think is right), in addition to the regular market of buyers who can afford houses at the current prices, the Israeli housing market is receiving buyers from an additional three groups:
(1) People who put themselves in financial jeopardy to buy a home
Many Israelis spend 40% or more of their paychecks to pay the mortgage. A number of Israelis home-buyers with whom I recently spoke used the same phrase “my wife works for the mortgage,” implying that all the money the wife brings home covers the a mortgage payment. Of course, economically speaking, where the money comes from is not linked to the item on which it is spent. If a father and mother both make money and one of them gives their child ₪ 30 for candy, the money doesn’t come from either the father or mother specifically, but from the income of the household. So too here, the couple has established an arrangement where they will be spending an extraordinarily large percentage of their household income on their mortgage. But less you think this is entirely crazy, most rentals are also much more than 30% of take home pay; these people are merely choosing Scylla over Charybdis.
But the danger is immense. If either spouse looses his or her job or has a financial surprise, the couple will immediately face a financial nightmare. While those who rent can’t just pick up and leave the second they wish, they are much more free to adjust when the need arises. And while rent may be high, renters do not have to bear the tremendous burden of home ownership (fixing things that break etc.) so a flat comparison between rent and a mortgage payment isn’t entirely accurate. Unfortunately, these Israelis risk following in the footsteps of so many Americans, facing foreclosure and possibly financial ruin when the slightest gust of wind pushes them off track.
(2) People who live on windfalls
Have you ever wondered how so many Israelis who just get by suddenly have money for a new car or an exotic trip aboard? The answer is that Israelis live on windfalls. Not merely inheritance, but pitzyuim, keren hishtalmut, even dmei havra’ah are structured to make sure that Israelis receive money in windfalls and spend it as quickly as they can. More recently, many Israelis are simply waiting for windfalls to pay off their mortgage or give them a cushion as they pay it off monthly. While this method has its advantages, it should be stated clearly that more and more Israeli companies are cutting back on giving a keren hishtalmut and even paying legal benefits like dmei havra’ah. So while spending a windfall is a great idea, relying on one can be downright dangerous.
When the interest rate was low, investors saw real estate as a safe investment with a 4% – 5% rate of return. So now that the interest rate is up again, investors are leaving the housing market and prices are beginning to fall. Yes, you read correctly; housing prices are falling. While only a year ago Moshe Gindi assured us that prices would never fall, he has gone back on his word, giving ₪ 150,000 – 235,000 discounts to Shufersal credit card holders who buy his properties. In other words, Gindi realized that his properties fell ₪ 150,000 – 235,000 in value and is trying to find a round-about way to say he was wrong.
In the coming weeks, I plan to explore some short term alternatives for those of us who cannot wait several years for the possibility of the market to become realistic again.
Are you looking for a home? What has your experience been?