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no one can afford to buy a house; the demand is pushing prices too high!

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legal warning: The information here should not be understood legally as financial advice. If you believe anything on this site is in error, please contact me. I am always open to corrections, new ideas, and new opinions...

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.

(3) Investors

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?


6 Comments

  1. Rachel says:

    Hi, I’m a student and buying is not on the horizon for a while yet, but for the past few years I’ve rented in Tel Aviv, Jlem, and now Be’er Sheva, and I’m interested to hear what you have to say about the “tent protest” going on right now about the rise of rental prices: http://www.ynet.co.il/articles/0,7340,L-4096185,00.html

    • jonnydegani says:

      While I applaud any national outcry physical real demonstration, I think that the students are misdirecting their anger. The Knesset cannot “fix” a market problem. If it demands that landlords charge less for students, then either landlords will refuse to rent to students or a black market will emerge.

      The Bank of Israel’s practice of maintaining an artificially low interest rate is what drew investors to the real estate market and ultimately caused the current crisis. Students should understand why the people at Bank of Israel did what it did and either (1) agree with them and back off or (2) disagree and tell them to stop subsidizing the export industry in Israel at the cost of housing. Either way, students’ beef should be with the Bank of Israel, not the Knesset Housing committee.

      In the next few weeks I plan to address what I think are more realistic alternatives to housing in the short run. Right now I am researching, so if you have any ideas, I am all ears.

  2. QT says:

    I think this list of buyers is a bit limited. You’re forgetting about all the people who bought homes at the bottom the market 10 years ago and can sell them now at twice as much, and thus buy the higher priced homes. This is common in Modiin, where I live, where people are selling their smaller homes in the older part of the city, which they bought cheaply on paper, to buy larger homes in the newer parts of the city. Actually, this is the case with us as well- we bought an apartment in Jerusalem in 2001 for $165,000 and it’s now worth about $580,000.

    Also, I don’t think you’re taking into account income gaps. The existence of larger, high tech salaries allows these workers to manage larger mortgages, pushing the prices up in the Merkaz, where these workers live and pushing non-high tech workers out of the market.

    There’s also army subsidized housing, which gives large groups of career officers discounts on new housing projects.

    Finally, if prices are starting to fall, then what is the problem? The market is correcting itself, so what is everybody worried about?

    • jonnydegani says:

      Hi QT,

      You bring up a number of excellent points. I would like to address them one by one:

      (1) Both my wife’s sister and brother are in the category you mention of trading up for nicer apartments. I was considering adding them, but ultimately decided that since they add an apartment to the market and take one off, their impact is limited. But you are correct, they exist and they drive the market toward slightly more expensive housing.

      (2) As for the high-tech salaries, these are the people in the 30% who can afford housing (by Ha’aretz’s definition); and are part of the regular market. This post addressed those who are dominating the housing and pushing it higher, despite the fact that when prices rise, supply should fall (note: I edited a sentence in the post to make this clearer). If it is all a matter of the income gap, then the number of high priced apartments would be limited by the number of people working in high-tech which I don’t think is the case (although I will freely admit that I have no evidence beyond my hunch.)

      (3) I plan to discuss the subsidized housing when I talk about practical solutions in the coming weeks

      (4) While prices are beginning to fall, it is not falling fast enough for people who are having it hard financially. When you lose your job, we’re in a recession; when I lose my job, it’s a depression. Apparently the same goes for housing.

  3. 4daughters says:

    We moved to the Golan where one can still buy/build a large home for under a million shekels. We have fresh air, beautiful scenery, a laid back lifestyle and a great community. However, jobs here are harder to find and don’t seem to pay as well as in the center.

  4. Lawyerguy says:

    Yes, currently looking, but not sure now is the best time to buy indeed, so very much looking forward to your next post!

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