Shomer Shekalim

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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...

fighting financial dictatorship

Years ago, when governments needed money to help their respective economies, their options were limited to taxing their own people and invading other countries.  Such measures were difficult; after all, people generally dislike taxation (with or without representation) and other countries have a nasty habit of defending themselves.  A few hundred years ago, this all changed when western government discovered that they could just print money whenever they wanted.  But when new money was printed, government bureaucrats tended to waste it on superfluous projects.  To counter this problem, monetary policy was born.  Monetary policy dictated that money would not simply be created and spent; it would be created and loaned out to job creating businesses at varying interest rates.  This would ensure that the money would be given only to businesses so that they could help the economy stabilize and grow.

When money is created from nothing, there is a price, inflation.  Everyone who has money looses some of its buying power when the government makes more money to give to itself, whether for superfluous projects or for lending.  Thus, inflation is a flat tax on money and monetary policy is a tool for collecting a flat tax without asking anyone if they want to pay it.  This is very convenient; when government levies taxes, citizens have the gall to see if there is a worthwhile reason for it and even ask that the tax be progressive.

Ancient Rome was famous for its occasional use of dictators.  Dictators would, for a limited amount of time, assume absolute power and make decisions when the public proved unable to do so.  The head of the Bank of Israel is our dictator for money.  He can decide to supersede the normal way of collecting money and lay a flat tax on all of our money by changing the interest rate and lending money.  The mark of a great Roman dictator was not his conquests, but how infrequently and precisely he used his power and ultimately, when he returned it to the people.    The head of the Bank of Israel should be the same.  In fact it is the frequency with which it uses its power and its complete disregard for the voice of the people that was caused our current financial upheaval.

The Bank of Israel has already admitted that its policy of keeping interest rates low caused the housing crisis.  The bank of Israel kept interest rates insanely low (2%) for all of 2009 and 2010, forcing investors into the only market with a decent payoff, real estate.  And since investors generally have more money than private owners, housing turned from a basic necessity to a piece of a portfolio.

The Bank of Israel insists that it had to keep interest rates low; after all, if they would not have intervened, then exporters would have failed and there would have been massive unemployment.  It was a choice between housing and jobs and Bank of Israel had to make it.

Let’s look at the alternative.  Imagine what were to happen if representatives of the Bank of Israel were to meet the citizens of Israel and explain that they will have to pay more taxes in order to subsidize exporting companies.  Public outcry would ensue, but once the cries die down, citizens would rationally ask for terms and conditions.  Okay, maybe that’s a stretch, but at least the democratically elected representatives of the people could decide on a list of reasonable terms and conditions (perhaps they would even form a ministry dedicated to finance!).  Israelis could demand that the companies submit a plan for their use of the subsidy and explain how they will become self sufficient within the next few years.  Israelis could demand that CEOs of such companies receive limited pay or that the companies do not lay off certain workers.  Then, either the company would agree to the conditions, bargain them, or choose to fold.

Instead, the Bank of Israel decided to play God with the economy and tax the people to bolster the rich.  And with the oversight of the people disregarded, the companies that benefited from the monetary policy reaped the benefits while becoming addicted to government subsidy through the low interest rates.  Now these companies are weaker than before threatening “too big to fail” if the government cuts off their crack.

But at least unemployment is low, right?  And the cost of living has not risen too much, so everything seems okay.  Not exactly.  The low unemployment rate ignores the underemployed.  There is no point in measuring the cost of living to the average or minimum wage when the dispersion of wealth is out of control and there are dozens of loopholes that that enable employers to pay workers well below minimum wage.

Since the social protests began this past summer, it has been difficult to pinpoint exactly what went wrong.  Bibi blames bureaucracy, the Bank of Israel blames the global economy and the Ministry of Finance isn’t sure who to blame because Israel still has low unemployment and solid growth – and this is the problem.  It is exactly this blaming, inaction, and relinquishing of power while denying reality that caused this financial crisis.  It was the government’s secession of oversight to the Bank of Israel and the Bank of Israel’s secession of Israel’s economy to the global economy that caused the current crisis.  As long as our representatives in the Knesset refuse to take back power from the Bank of Israel, they cannot do anything to fix the economic crisis.  And if they refuse to do anything, I suggest we get rid of them and elect representatives who will.

tournament theory and the medical solution

Have you ever wondered why your incompetent boss makes so much more than you?  Well, economists have an answer, tournament theory Developed about 30 years ago, tournament theory suggests that most offices are a tournament where differing workers compete for a prize, which is usually given in the form of a promotion.  Tournament theory suggests that your boss’ pay is not so large because he or she deserves it, but because it is meant to motivate you.

Does the pay difference between you and your boss have to be so large?  At first glance, the answer would seem to be yes.  Let’s take an example of a payment compensation scheme at the fictional but squeaky Rubber Duck Company.   The manager tells the workers that whoever makes the most rubber ducks gets $100 and everyone else at the company will make only $40.  The workers know they are guaranteed $40 and would only put in up to $60 worth of additional effort in order to get the prize; anything else would be a loss.  Realizing this, the manager changes the pay scheme, telling the workers that the winner gets $100 and the loser gets $10, thus increasing the amount of work that each worker will put in to approximately $90.

But first glances can be deceiving.  As the working season begins, workers begin sabotaging one another.  Also, some workers who were previously able to try and put in the $60 of extra effort have cut back entirely because they know they will never be able to produce $90 of extra work like some of their more able coworkers. Finally, one worker notices that a rival company, Quackers, which is currently hiring, is planning on giving their workers the same deal as the Rubber Duck Company except the top prize if $65 and the bottom is $40. Realizing that working at Quackers guarantees $40 and would only require up to $25 of extra work, many workers leave the Rubber Duck Company and their over-competitive manager.

So what’s better, a large spread or a small spread?  Like most things in economics, there is an equilibrium point.  Far from being perfect, this point may end up discouraging a whole lot of workers, especially when there is luck and protectsia involved.  One solution to this is to offer a few different prizes.  Suppose the Rubber Duck Company offered $90 to the best worker, $70 to several runner ups and $40 for the rest.  With not so much of their pay at risk, workers would be less antagonistic, perhaps even helping one another in alliances.  These workers may also take a shot to win the prize, whereas in the past, the out-of-reach goal was discouraging.

In a recent round of negotiation between the Israeli Medical Association, tournament theory, whether using its name or not, was among the many, many issues discussed.  Doctors have been leaving the public sector for many reasons, one of which is a lack of advancement.  In a standard department of a hospital, there are two levels, regular doctor and department head, a position held until retirement.  As a compromise, a new position between regular doctor and department head, or second tier prize, has been offered.  This new position will be called ” service manager.”

This compromise gives me hope.  Creating an in-between level is the obvious solution to discrepancies that are way too high.  Perhaps in time, there will be less department heads, and more service managers who will become the new de-facto department heads with pay discrepancies not as insane as the ones currently in place.  I am curious to see if this works and I am even more curious to see if it can be applied to office life as well.  Perhaps creating loopholes around the levels of bureaucracy ordained by the government and accepted business practice, we can deal with the income disparity in Israel without the need for a socialist revolution.  Or maybe I am too optimistic.  Perhaps we need the pendulum to swing the other way in order to get better social benefits and address the growing income disparity in Israel.

What do you think?

Buy Later, Not Now

A couple of weeks ago, the AACI sent out a link to what I believe is one of the most disastrous examples of journalism I have ever seen in my life.  The article, which was printed in Ha’aretz on August 8, shouts, “Buy Now, Not Later.”  In this article, the author defies logic, standard economics, and all of the experts he interviewed in order to encourage buyers to purchase a home at what may arguably be the worst time to buy in Israel’s recent history.

After stating that people on the internet (like me) believe housing prices are falling, the author insists that conversations with five experts “lead to some different conclusions.”  He points out, correctly so, that the real estate market is more complex than people realize.

Then the article gets ridiculous.

… if people think contractors who paid a lot for land on which to build will agree to sell it at a loss, they are very, very wrong. Nor can the government make them do so. Developers are already doing the math ahead of possible changes, and may well hunker down and not build. Yes, the developers are leveraged (they borrow money to buy and develop the land ) and yes they have to repay debt. But don’t forget that in the last few boom years, they accrued profits and achieved liquidity. They still have a great deal of breathing room.

While I am sure that the developers are making their calculations about holding onto their land to sell when the market is high, they’d be idiots to refuse to build on land they already bought because prices have gone down.  The land they bought is a sunken cost, and if the real estate developers have any common sense, they will not let it affect any of their business decisions.

Even at year-end 2008, when contractors really were in distress, they didn’t lower prices. So, in short, if developers have already bought land, they will simply wait to develop it.

These two situations are not comparable at all.  At the end of 2008, consumers were afraid to invest, so realtors waited for the initial hysteria to pass and then went about business as usual.  In our current situation there will be a fundamental drop in the cost of land, and new suppliers will enter the market, driving down prices.

The banks have also been doing some math. Because of the increase in interest rates and the war the government declared on property speculators, they’ve concluded that demand will be diminishing. Therefore, they have to be more tight-fisted and stringent when lending to developers. That in turn means that in contrast to the government’s wishes, the supply of housing is not about to increase, and the problems wracking the market today will not disappear in the foreseeable future.

Banks will, of course, do the math to see which developers are more viable than others.  And perhaps they will show themselves to be more elastic and the developers will have to take a bigger cut in their profits.  This may be seen as a slight increase in the cost of developing and will shift prices slightly upwards.  Just because a counter-force exists doesn’t mean that buyers will not benefit at all from the tremendous drop in the cost of lands.  Remember, consumer don’t have to buy; they can rent.  Investors don’t have to invest in real estate; they can invest in something else.  But it isn’t simple for real estate developers to change their entire business.  The consumers are more elastic than the developers and will therefore gain more from the drop in price and suffer less from the slight counterforce of the banks.

In general, there’s more and more evidence that the thesis guiding the government – that housing prices have been skyrocketing because of meager supply – is wrong. Most of the problems are on the demand side. Studies by the Bank of Israel and other bodies clearly show that the drop in interest rates is the chief explanation for the jump in transactions and price increases since 2008 (bold mine). Low supply brought less responsibility.

Just because the problem was caused by too much demand, doesn’t mean that additional supply will not fix the problem.  Let’s say  I was the only maker of ice cream.  Everybody wanted what I had to offer and I jacked up the price to $1,000 for a scoop of vanilla (a demand problem).  If you add 1,000 more vendors (supply solution) the price will go down.

Many think the supply more or less meets the demand of housing which people buy to live in: What changed matters was a 50% leap in buying homes for investment purposes from 2003 to 2009, they say. That upset the balance. Here again the problem is demand, not supply.

Here the author makes a good point.  Housing prices didn’t just go up due to low interest rates.  What started the hike in housing prices was the worldwide trend to invest in real estate.  This trend began in the late 90’s in the United States and went viral.  The Banks of Israel’s only made the problem much worse and turned it into a full blown disaster.

Finally, the author finishes his economics lesson and gets to his experts.

Hi first expert, Avraham Kuznitsky, is a controlling shareholder of construction company, so you know he is going to be impartial.  While conceding that prices will fall, Kuznitsky says that people will continue to buy.  He does not address the investors leaving the market, nor that many Israelis simply cannot afford a home.  Most importantly, he does not say the words that are written in bold before his name in the article, “prices will never drop.”

The next expert, Avi Drexler, head of the Israel Lands Administration from 1998 to 2000, is summarized as having said that he personally feels that “prices have peaked and will either stagnate or recede.”

The third expert, Dr. Yair Duchin from Ono Academic College, an economist specializing in real estate, says that “If you want to buy a home to live in – find the right one and buy it.”  He doesn’t make mention of those who currently cannot afford to buy, nor does he state that house prices will remain stagnant.  He simply suggests that “when you buy a home to live in, leave aside considerations of whether prices will either rise or drop to some extent.”

The fourth expert, Zvi Stepak, chairman and chief investment officer of Meitav Investment House, states, “The trend now is prices stabilizing with a tendency toward going down. It’s hard to estimate how much they will drop, but I expect the rate to reach 10% to 15% or even more. It largely depends on the global economy and on Israel’s macroeconomic situation.”

Are you keeping score?  So far out of four experts, none of them have said that prices will not go down.  Let’s check in with number five, Dr. Avichai Snir of Bar-Ilan University.  Dr. Snir says that people are in fact attracted to higher priced housing because of the socioeconomic status that comes with it.  He then summarizes what he believes to be the cause of the current housing problem:

Anyone who couldn’t afford a high-priced apartment beforehand suddenly discovered that with interest rates low they could enter the market. But for the same reason – the low interest rates – investors also entered the market and a situation developed where tenants competed with landlords, meaning investors, over the same apartments. Since landlords are more powerful they won out over the tenants as prices rose.

Dr. Snir makes a very good point.  But by pointing out that tenants don’t have the money to buy a home in the current market, he leaves one problem wide open.  Now that investors are leaving the market and the tenants don’t have the money for the high prices, what’s going to happen to prices?  Yeah, I thought so.

In short, none of the experts quoted in the article said that prices will not fall, not even the impartial expert who works for a construction company.  People will buy; people always continue to buy, but the amount is declining and prices are falling.

Next: a post that is not about the housing crisis!

yad2 – another man’s treasure

A few months before we got married, my wife and I began searching for some furniture for our new home.  Luckily, we had friends and family with an extra computer table and even a dining room table.  The only thing we had to pay for was our bed.  Unfortunately, the only decent bed we could afford was a child’s bed with a second pull out high-riser.

Or so I thought.  Like most Americans of my generation, I was taught that giving your old stuff to charity is a great thing, but buying second hand is just not done.  So we bought a new bed, even if it was bottom of the line.  I didn’t have the ₪ 3,000 for a brand new pair of beds, and certainly not enough to get actual mattresses.

As the years began to pass, a lot of the furniture we received broke, fell apart, and even just wore itself out.  The first to go was our computer chair which, due to a pipe bursting, got wet inside of the material and began to fill up with mold.  I looked around the internet for a chair until I somehow came across yad2.co.il and saw that someone was selling a brand new black computer chair for only ₪ 100.

And so, my love for yad2 began.  When my dining room table broke, I found a second hand dinning room table and chairs for ₪ 200.  When my son’s stroller was stolen, I got the upgraded version of the same stroller for only ₪ 250.  And when my son celebrated his first birthday, I got him a full sized bean bag (פוף) for only ₪ 20.

Yad2 has more than just second hand bargains; it has a section for stuff being offered for free as well.  It was through yad2 that I found a feeding chair for my son, as well as several toys and books (in English and Hebrew).

After 4 years of slowly learning that second hand was okay, my wife and I came full circle and decided to get a normal bed.  After searching for a couple of weeks, we found a slightly used pair of beds (with הפרדה יהודית) and mattresses for ₪ 550, a little more than a third of the original price we paid for our new bed 4 years ago.

If you need any furniture, I highly recommend using yad2.  Whether you are a student, a couple just starting out, or simply someone who likes to find a bargain, yad2 has a ton to offer.  The most important thing when using this site is patience.  You may not find your ideal dining room table the second you look, but it will very likely appear within 6 weeks.

PS – June through August is an especially good time to buy second hand items, as it is the time of year when many people move.  You can also check Janglo for lists of second hand goods from people moving back to the United States.

Do you know of another good site for second hand goods?  If so, please mention it in the comments below.

Gone with Your Home

If you ever read or saw Gone with the Wind, you had a first hand look at one of the most peculiar economic phenomena of the 1800’s.  During the American Civil War the Union (North) had surrounded the Confederacy (South) with a naval blockade aimed to cut off the Confederate States from trade.  Overnight, blockade running became the major business of the South and the Rhett Butlers of the era were born, supplying the south with a lavish array of dresses, jewelry and perfumes.  Unfortunately, the blockade runners didn’t bring one very important thing, food.

The Rhett Butler Effect, as economist and historian Mark Thornton would later call it, occurred due to poor public policy in the South.  In a desperate attempt to collect money for the war, the Confederate government heavily taxed blockade runners.  In response to the tax increase, blockade runners either exited the market or limited their business to items with a greater payoff.  Towards the end of the war, the Confederate government realized that the south was starving and demanded that the blockade runners use a portion of their vessels to smuggle food, which could only be sold at a price well below market value.  This new policy, much to everyone’s surprise, had the opposite effect.  Instead of increasing the amount of food available to southerners, which was already low, runners reduced the amount of food they smuggled because the price limits on the food had them selling it at a relative loss when compared to the potential profit they could be making smuggling luxuries. Since the “cost” of smuggling rose significantly (from the danger of running a blockade to danger + tax to danger + tax + cargo space) even more runners quit the business, those who remained in the business were only smuggling luxuries, and the people of the south starved.

Frankly, you will give a damn.

I understand the tent protesters; I personally struggle to live in a small home, all of 35 meters, along with a wife and child.  I agree with their disgust at the Israeli government, which kept interest rates artificially low, driving cautious investors to the real estate market, sacrificing the housing market in order to subsidize exporters through monetary policy.  I agree that massive housing reform is needed and that government bureaucracy needs to be eliminated.  But when the protesters demand public housing or that builders be bound to build a certain percentage of apartments for a more affordable selling price, I strongly disagree.  Much like the Confederate policies of taxation and reserving cargo space for below market value food, the public and / or affordable housing demands will only exaggerate the effect of an already corrupted market.  In the end, students may get their housing, but when the shortage becomes worse, they, along with the middle class, will be left to suffer.

“Sir, you are no Gentleman.” 

“And you are no Lady.”

Over the past few weeks, both sides have become increasingly unreasonable.  Netanyahu wants the free market to take care of everything, not understanding that students cannot wait until the free market undoes the government’s damage.  Students want affordable housing using government intervention, not understanding that government intervention caused the housing crisis in the first place and that if the government legislates in their favor, some other group (the middle class) is going to have to bear the burden.

“With enough courage, you can do without a reputation.”

The ingredients for a solution are clear.  Israel needs a solution that eliminates the government monopoly on land, plows through bureaucracy and lets the free market correct the mess we’re in, while at the same time providing solutions for those who would otherwise suffer during the market recuperation.

The solution to this problem should therefore have two answers.  First, Israel needs solutions like Netanyahu’s “supertanker” to break through the myriad of government offices that control too much land and slow construction.  At the same time, the Israeli government should provide a temporary solution to students, one that can provide cheaper housing as soon as possible and at a minimal cost.

One such idea would be for the government to give away some of its land in order to build small villages for students from shipping containers built via prefabricated construction (בנייה קלה / בנייה מתועשת / בנייה טרומית).  The government could have an auction among the many providers of prefabricated construction in Israel and choose a handful of suppliers to build student villages as efficiently and quickly as possible.   These companies would be obligated to build either small houses or apartment buildings with living spaces of a predetermined size and quality in return for the ability to charge the students a predetermined amount for rent that is set in advance by the Israeli government.  The construction companies would then bear the financial burden of the building; the government would only have to subsidize the land and its development.   While students live in such housing, they will temporarily exit the real estate market, driving down prices for everyone else.  Once several years have passed and the market recovers, the government could begin to slowly limit the rent controlled housing and allow the students to reenter into a reasonable housing market.  And the best part is that unlike any other solution, this one can be completed in as little as 90 days, as builders of such projects usually complete them in record time.

For those of you worried that such housing is impossible or unlivable, let me assure you that this is not the case.  Containerized housing units are used in England, the Netherlands and all over Europe as a high quality, inexpensive alternative to  building houses.  In the UK, containers are being used to build not only small homes and stores, but also hotels and entire neighborhoods.  Building apartments from containers will allow housing to be built with less land, high standards, and with the lowest possible carbon footprint, which is bound to appeal to college age protestors.  Here are a couple of examples of such buildings :

In order for a real solution to be reached the Israeli public needs a compromise that is more than mutual bribery between the the government and the protesters; it needs a plan that will take care of Israel’s citizens in both the long and short run.  Hopefully this plan, or else another (I don’t claim to hold the monopoly on good ideas), will do just that.

Do you have any solutions to the housing crisis?  If so write them below

PS – If you agree with this solution in this post, or even just like the few Gone with the Wind quotes, you can pass this article along by using the social networking links below.

Housing Solutions Part 2: Young Couples and Families

A few weeks before I got married, my wife found a small place for us to live in Petah Tikvah.  Upon seeing it, I remarked that this small apartment, all of 35 meters, would be okay for the first year of our marriage, but then we’d surely move.  Four years later I not only still live in the same apartment, now with a child as well, but also pay ₪ 500 more per month than when I started.

The housing crisis is real.  Almost everyone I know who does not own his or her home is paying between 40% – 60% of his or her household’s take home pay for either rent or a mortgage.  This is before paying utilities, transportation, clothes and small unexpected expenses.  Oh, and did I mention that these people need to eat? 

I am not talking about people who are wasting money on unnecessary luxuries; I am talking about people who live fiscally responsible lives, who put in a full day’s work at a job that pays (relatively) well and want the ability to simply live in an apartment large enough to house the people inside of it.  We can’t just wait for the invisible hand to correct itself, and certainly not while the government ties the invisible hand behind its back.  We can’t wait for the long run because, in the immortal words of my least favorite economist, “in the long run, we are all dead.”  So what can we do now?

(1) Go North – housing is cheaper in the North and dirt cheap in the Golan.  And while the businesses in these areas generally pay less, the quality of life is much higher.  Also, remember that a penny saved is more than a penny earned (you don’t pay taxes on a penny saved).

(2) Rent over the Green Line (especially in the seam zone).  There is a lot of affordable housing in places life Efrat, Beitar Illit, and Karnei Shomron.  I single out places like the seam zone because they are close enough to allow a relatively easy commute to nearby industrial areas, but the truth is that most yishuvim over the Green Line are cheaper.  If you are looking for a yishuv over the Green Line, I would recommend using Peace Now’s interactive map that discusses all the yishuvim, their populations and where they are in relation to the barrier (I also appreciate using the map for the exact opposite of what its creators intended).

(3) Follow the transportation.  In my post to students, I suggested that TA students look for housing near the Petah Tikvah central bus station because it is just one bus ride to school.  The same goes for a myriad of other neighborhoods in and out of major cities.  If you live without a car, follow the bus lines from your work (in time, not distance) and see which lines or combinations of lines can take you to neighborhoods with cheaper housing.  For those of you with cars, follow the open highways and see if there is a place outside of the city that is only a small commute away.

(4) Don’t buy now.  Even if you have the money, now is the worst time to buy.  We are at the peak of the market and even if prices will go higher, they will fall soon. Yes, I also hate when economists try to act like prophets, but with higher interest rates and government action stirred against the high prices, I don’t see how housing prices can stick for even another year.   (Note to self: If in one year housing prices do not fall, go back and revise this post).

(5) Stick it out (just a bit longer.)  In keeping in line with the last point, prices seem to be slowly beginning to go down.  If you rent, you should probably plan to move in about a year.  Strangely, while the odds are that your landlord will not lower your rent, you will probably be able to find a similar place to live that is much less expensive (I will try to address this phenomenon in another post).  So if all of the options above don’t suit you, just stick it out a bit longer until the prices begin to fall.

Please note that when considering any of the solutions I suggested above, one must calculate how much one can earn (after taxes), how much one can pay in time and money for transportation and what is socially reasonable.

How have you been dealing with the rise in housing costs?  What solutions or recommendation can you offer?

why Bibi is right (and why government bureaucracy is wrong)

I cannot believe I am in agreement with an Op-Ed from Haaretz.  In the following piece, Nehemia Shtrasler does a fantastic job explaining Bibi’s response to the current protests, that government control is the problem and removing it is the solution, and why students are shooting themselves in the foot by not embracing this simple fact.

Israeli housing protesters are missing the point

The protesters on Rothschild Blvd. hate privatization and despise the free market. They want the state to continue controlling the land, and don’t understand that this is costing them billions.

By Nehemia Shtrasler

Saturday night, the Likud party sent its secret weapon to the front lines: Social Affairs Minister Moshe Kahlon. Kahlon spoke sympathetically about the tent protest; he said he understands the demonstrators and identifies with them; he even said that Prime Minister Benjamin Netanyahu would come up with solutions within four days.

But Kahlon’s promises didn’t help, and the demonstration in Tel Aviv that night succeeded beyond the organizers’ expectations. That’s because the housing protest has genuine cause, and the middle class’s feeling that the government is simply exploiting it is backed by solid facts.

Let’s start with housing. Home prices really have skyrocketed over the past three years. In Tel Aviv, they’ve gone up 64 percent, to the point where to buy an average apartment, one needs to set aside 143 (gross! ) salaries – 12 years of work. That is insane.

The problem is that the young people on Rothschild Boulevard are objecting to any suggestion that could improve their situation.

The first and most important thing that must be done is to dismantle the Israel Lands Administration. We must get rid of this dinosaur, which is the primary reason for the rise in land and apartment prices. The ILA, an archaic monopoly, controls 93 percent of the country’s land and releases it in a miserly fashion in order to get the highest possible price.

Rather than continue this profiteering, the ILA should be forced to sell all the state lands it controls to the public – that is, to privatize the land and turn it into a freely marketed commodity. If the ILA merely announced such a new policy, we would immediately see land prices come down, and apartment prices as well.

But those occupying the tents on Rothschild Boulevard hate privatization and despise the free market. They want the state to continue controlling the land, and don’t understand that this is costing them billions.

The second thing that must be done is to reform the planning and construction approval process. Getting plans passed by all the various planning and building committees delays the issuance of building permits by at least two years, which jacks up the price of apartments.

But the Rothschild youth oppose this, too. They like the “green” groups that submit endless objections that these committees must consider, and which keep construction plans tied up for years. This is another factor keeping home prices high.

Another suggestion that would increase the supply of apartments and thus lower their price is to build more high-rise apartment buildings. Why not approve buildings that are 20 to 30 stories high, rather than the eight or nine floors that are currently the norm in residential neighborhoods? Why not give generous building rights to various urban renewal schemes that would allow the construction of apartment buildings 20 to 30 stories high?

But the Rothschild protesters don’t like this, either. They say it destroys the urban fabric and increases population density, even though Tel Aviv is far less crowded than, say, London. This is also why they refuse to accept the division of some of Tel Aviv’s larger apartments, a process that could add hundreds of apartments to the city almost immediately.

The Rothschild crowd also doesn’t want to understand that there’s a connection between their support for illegal infiltrators from Sudan and the lack of inexpensive apartments in south Tel Aviv. Once, they could easily have rented a cheap apartment in the Hatikva neighborhood or other areas in the south of the city. Now these apartments are occupied by tens of thousands of migrant workers from Africa, against whom they have nary a word to say.

And what about the link between paving new roads and the price of apartments in Tel Aviv? This is something else the tent-dwellers refuse to understand. They protested the construction of Route 6, which has greatly shortened the distance to and from the “periphery” and allowed many people to live in Yokne’am or Kiryat Gat and work in Tel Aviv. Without this road, Tel Aviv home prices would be even higher.

But if we were to expand the discussion to speak about the heavy burden borne by the middle class overall, we would hit some sensitive spots fairly quickly. Because the ultra-Orthodox population doesn’t work, and also gets billions from the government, including subsidized housing. The settlers have gotten particularly cheap housing, wide roads and flourishing towns that cost billions. We have an incredibly high defense budget, which is the result of an unwillingness to come to a diplomatic agreement.

Somebody’s got to pay for all this. And the ones who do are the middle class.

simple tips to create an effective budget plan

Hi.  In keeping with the last post’s ending about the importance of keeping a budget, no matter how simplified the budget, the following guest post was submitted outlining a few steps to get going in the right direction.  In the next post,  we’ll get back to housing solutions.

Author’s Bio: Sophie Kinsella is a contributory guest columnist for various websites and communities including Oak View Law Group and CMFA . She has completed her Graduation in Finance and is currently working with an Investment company located in California. She has written some great articles on topics like bankruptcy, investment opportunities, debt management plan and more.

People are generally afraid of formulating a budget plan but it is an essential part to manage your finances. Consumers who did not plan a budget they generally incur insurmountable amount of debt as they start spending recklessly. If you are struggling to pay off your debt then formulating a debt management plan can help you eliminate your debt. If you hire a debt management company then the credit counselor will evaluate your financial situation and create a budget plan so that you can pay off your debt with ease. If you are preparing your own budget plan then here are the following things that you need to keep in mind: 

1. Calculate your owed amount:

Try to calculate your total amount of debt you owe to the creditors along with the interest on it. Write down amount of debt your need to pay back in descending order of the interest rate. You need to keep aside a potion of your income so that you can start paying off your debt. Put extra money towards high interest loan so that you can eliminate it immediately.    

2. You need to plan your budget according to your financial state. Therefore, track your income and expenses as it will help you prepare a stringent budget plan. You can maintain an excel sheet where you can incorporate your daily expenses as it becomes easier to track your monthly expenses.    

Items

Week #1

Week #2

Week #3

Week #4

Monthly Expenses

Groceries

Transportation

Electric bills 

Medical expenses

Emergency exp. 

Entertainment

Total weekly expenses

This chart will help you check whether your expenses exceed your income. 

3. Curtail your extravagant lifestyle:

When you plan your budget then your prime objective should be to pay off your debt. You can curb your lavish lifestyle to utilize the money to pay off the debt. Avoid eating at a plush restaurant when you can arrange a good sumptuous dinner at home. You can reduce you unnecessary expenses like gym memberships, splurging on branded clothes and curb your entertainment expenses. The money you save can be used towards paying off your debt.   

4. Open an emergency fund:

You can set aside a portion of your income in the saving account as it can be used in time of financial crisis. If you have an emergency fund then you don’t need to skip your debt payment to pay for the unexpected expenses. 

Budgeting is about managing your finance in an organized manner therefore you don’t need to panic while planning your budget. It will help you secure your financial future and liberate you from debt.

Housing Solutions Part 1: Students

Unless you’ve been living in a tent

Unless you’ve been on the street

Unless you’ve been secluding yourself voluntarily from the news this past week, you have probably heard about the current tent protests.  Students have taken to the streets in an effort to demonstrate to the government the urgent need for affordable housing.  While the macro-economist in me has a myriad of solutions to offer, the skeptic in me knows that the government will not do anything (after all, they caused the problem) and the responsibility to find affordable housing will ultimately fall onto the student.

This does not in any way excuse the government from its responsibility.  The government could and should offer affordable housing to students by building dorms, building public housing, or even recognizing more universities in Israel, increasing choice and allowing students to attend schools in cheaper areas.  In a true exercise of justice, the government could have the exporters subsidize student housing; after all, it was government practices in favor of exporters that caused the rise in housing prices in the first place.

But this post will not deal with what should be; rather it will deal with practical advice for students looking for affordable housing in the current economic environment.  Here goes:

#1 – Consider housing further away from the University.  There are many cheaper housing options that are a single bus ride from the University.  Consider a student from Tel Aviv University.  This student could look for housing in Tel Aviv, or could look for one next to the central bus station in Petah Tikvah – where a single bus can take the student straight to and from the University.  Similarly, a student at Hebrew U could look for housing in Efrat and a student at Ben Gurion could look for something in Omer.  There are obvious difficulties with living further away such as the time and cost of transportation, the impact on social etc, but a simple cost benefit analysis should be done to see if such a solution is feasible.

#2 – Get more roommates, even if it means getting a bigger place.  Like the last idea, you need to check the math before applying this one to your particular case, but in many instances, getting an additional roommate can save a lot of money.

#3 – Save money on food.  Do you buy food at the cafeteria?  Well, whether you save the money on rent or on lunch, it is the same ₪ 300 a month.  Consider packing a lunch for yourself.  Choose one night where and your friends cook the food you will eat for the next week (a bowl of chili and some pasta can go a long way).  And if you’re the type to use the snack machine at school, begin buying your snacks in bulk at the grocery store.  Why spend ₪ 10 for a candy bar when you can spend just ₪ 4?  Bring a water bottle around with you and fill it at one of the schools’ Tami4 machines instead of dishing out ₪ 6 for bottled water.  This money adds up in a big way.

#4 – Cut down on luxuries.  Do you go out drinking with your friends?  Do you go to restaurants on more than a weekly basis?  Try to find cheaper alternatives – buy a bottle of alcohol and drink with your friends in someone’s apartment or on the beach.  Eat lunch with your friends in the park instead of going to another fancy restaurant.  If you smoke, stop. And for God’s sake – make your own damn coffee.

#5 – Get a part time job.  Nothing will help you learn the true value of money and how to use it responsibly like having a part time job.

#6 – Don’t buy textbooks.  With few exceptions, you will never use them.  And when you do need them, you can usually borrow them from the library (or at least use it in the library and either do your work there or photocopy the few pages you need).

#7 – Live on a budget.  There is no solution that I can think of that does not hinge on the simple fact that a planned shekel goes further.  Budgets are not just for families; they are for anyone who needs to be in control of his or her finances.

The housing crisis is just one of many financial crises that students will face in their adult life.  In the real world, it doesn’t matter if someone can write a research paper; what matters is his or her ability to juggle responsibility, family, a social life, commuting, luxuries, and expenses.  During one’s college years, learning to live on a budget may actually the most important step he or she takes towards adulthood.

Speaking of adults, in my next post, I plant to deal with housing solutions for young couples and families. 

Students:  What do you think is the most feasible change you can make in your financial life in order to accommodate housing?

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

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?