this article is a slightly more in-depth version of the op-ed I wrote that was published in the Jerusalem Post.
This past summer, hundreds of thousands of Israelis gathered to protest for social justice; an end to the widening economic gap plaguing Israel’s poor. The demands were simple: cut down on the government corruption and change the monetary policy that work in favor of big business and begin taxing the rich and redistributing wealth. Unfortunately, after months of protesting, the Israeli government on the advice of the Trajtenberg Committee, only marginally changed the tax system, not only failing to address the economic gap with income redistribution or monetary policy, but worsening it by giving disproportionately large tax cuts to the wealthy.
How exactly in the midst of public outcry for reform did the Netanyahu government manage to fit in more tax cuts for the wealthy? The secret was the expansion of a tax loophole using Bituach Leumi, National Insurance. For absolutely no reason, Bituach Leumi, unlike all other programs that are either controlled by the government or sponsored entirely by it, collects its revenue through a separate income tax.
This tax, along with the bureaucracy of Bituach Leumi, has a long history of working against the less fortunate. In particular, Bituach Leumi ignores tax credits and disenfranchises Israelis working more than one job from doing a full tax alignment by demanding that workers do an additional Bituach Leumi alignment and then systematically drowning the workers in confusion, bureaucratic incompetence and paperwork until processing such an alignment becomes economically prohibitive.
Worst of all, Bituach Leumi’s income tax makes Israel’s tax system regressive for the super wealthy, dropping the marginal tax rate for those who earn above a declared ceiling. Previously, the ceiling for Bituach Leumi income tax was NIS 73,422 per month – up to that amount the tax rate was 12 percent, and any income over that amount was not taxed. The Trajtenberg Committee advised dropping that ceiling to NIS 41,850 – in other words, giving a substantial tax cut to both those earning between NIS 41,850 and NIS 73,422 per month and those earning above NIS 73,422 per month. The government approved the measure, which will go into effect next month.
A comparison of the overall income tax rates from 2011 and 2012 shows that Trajtenberg Committee’s reforms ended up not only giving the super wealthy a greater tax break than their less fortunate counterparts in absolute terms, but also in percentage of total income earned.
Consider the charts below of a simple male worker in 2011 and 2012 with 2.25 points.
Notice in the second chart that once a worker makes a bit more than ₪ 40,000, his tax break rises significantly. That’s the Bituach Leumi ceiling kicking in.
But what about the points? Certainly all the new points for young fathers should fix this up, right? Alright, let’s completely disregard women (after all, the Trajtenberg Committee certainly does…) and deal with the case of a father getting 4 extra points for his children. The graphs would look a bit better:
In this case the less fortunate father would only get a slightly bigger tax cut than his wealthy counterpart.
And this is completely justified; with the price of daycare through the roof and working mothers unable to use their tax credits, helping fathers is a fantastic idea proposed by the Trajtenberg Committee, although an obviously better solution would be to let married couple share points, like they do in the US.
Regardless, giving a few tax credits to the poor does not justify the tremendous tax cuts given to the rich.
The justification for the Trajtenberg committee’s recommendation to cut taxes for the rich is that high income earners were setting up shadow companies to get around paying Bituach Leumi taxes. It was reasoned that by lowering the Bituach Leumi income tax, high earners would be more likely to pay their taxes.
But exploiting one loophole to avoid another is unacceptable, especially when the government can easily close both. The government seems to fear a mass exodus of the rich, which is absurd. No intelligent CEO will just up and leave his job, family and country because he has to pay his taxes, and if he or she does, Israel has more than enough local talent to compensate. This is exactly the kind of corrupt kowtowing to the super wealthy that sparked last summer’s protests.
Israelis need real economic reform that rolls back some of the supply side policies and takes a fresh look at what is supposed to be a progressive tax system. Bituach Leumi should be incorporated into regular income taxes, laws that enable tax loopholes need to be closed and points should be awarded not only based on the individual worker, but also on his or her respective family unit. One we take these preliminary steps, perhaps the Israeli government will finally be able to legislate kind of reform that was promised this past summer.
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.
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!
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.
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?
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.
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.
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.
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?
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?
A couple of weeks ago that the media exaggerated some statements by the Ministry of Finance and the Bank of Israel to make it look like a full blown brawl was about to erupt. In summary, the Bank of Israel raised interest rates and the Ministry of Finance wanted to make sure that foreign currency was still being bought on a regular basis. No one even threw a chair. So why all the hullabaloo?
Right now we are in the middle of a double edged crisis – on one side we have a housing bubble and on the other side a looming export crisis. According to many economists, the Bank of Israel and the Ministry of Finance were disagreeing about which problem to tackle and which to ignore, assuming both are mutually exclusive.
Before passing judgment, it is worth taking a closer look at these two problems and how they impact our lives.
Let’s begin with the housing bubble, or as I call it, “The Jon Degani will never be able to afford an apartment crisis.” Prices are rising for a couple of reasons:
(a) Investors – two types of people generally buy property, people looking for a home in which to live and investors. When we have a bad market (and low interest rates abound), then investing in an apartment is a pretty good deal. If an apartment costs ₪ 800,000 and it receives rent of ₪ 3,000 per month, then investing in an apartment is a solid investment with a return of 4.5%. I know it doesn’t look like much, but it makes for a nice piece in the portfolio, especially when other investments perform so poorly.
(b) Everyone else – when money is cheap to borrow, people tend to borrow more of it. So when interest rates stay low, soon-to-be homeowners are able to borrow larger sums and pay more for housing, driving up prices.
(c) People leaving the periphery –As more people migrate toward the center of Israel, the demand for housing increases and the prices rise.
It would seem that the simple solution here would be to just raise the interest rate. When the interest rate is higher, less money is borrowed, less money is put into the economy and inflation is curbed. Also, with higher interest rates, investors will leave the real estate market and move toward government securities. Unfortunately, not every solution is so simple. Increasing the rate of interest would worsen our looming export crisis.
Our export crisis:
Israel is an exporting country. Correction, Israel is a country that imports a lot of goods, fixes them up and exports them for a profit (if you look at Israel’s major imports and exports in the CIA factbook, you’ll notice that our imports and exports are mostly the same). In fact, over 40% of our economic activity comes from exporting (source) and if the shekel were to be too strong, exporters would loose a tremendous amount of money. How so?
Let’s say that $1 = ₪4 and diamonds are $1 a kilo raw, $1.50 per kilo polished. Israel imports one kilo for $1 worth of diamonds for ₪4, polishes them and resells them for $1.5 = ₪6. This would earn Israel a ₪2 profit.
Now let’s say the shekel gets stronger and $1 is worth ₪3. Israel imports one kilo worth of diamonds for $1 (₪3), polishes them and sells them for $1.50 = ₪4.50. This would only earn Israel a profit of only ₪1.50
When the shekel gets stronger, imports and consumer prices drop causing customers to pay less and sellers to profit less. Since Israel is the seller, Israel prefers for the cost to be higher so that it can profit more.
As the dollar plummets, Israel risks the shekel getting too strong, hurting not only exports, but all businesses tied to them (for example, the diamond polishers mentioned above).
So how can Israel solve this problem?
1 – Israel’s central bank can lower interest rates, driving down the value of the currency. But of course, this would worsen the housing crisis so the Israel’s central bank chooses to…
2 –Buy dollars every day. By buying dollars, Israel adds more to the supply of shekels, driving down the value of the shekel compared to the dollar.
“Hold on a second” you may ask. “If we artificially inflate the exchange rate, then exporters profit at the expense of private citizens who have to pay higher prices for consumer goods. Why should the producers be allowed to profit at the expense of the consumers? If the prices have legitimately dropped, then let them get used to the new economic reality!”
Good question (thank you). The truth is that if the dollar were to permanently fall, then the Bank of Israel would be stupid to try to maintain an artificial exchange rate; it would only end in another bubble bursting eventually. But the Bank of Israel does not think the dollar will fall, at least not permanently. The Bank of Israel is afraid of what will happen when the exchange rate, whatever it is, becomes too volatile.
Austrian Economist Eugen von Böhm-Bawerk explained this problem in his capital theory. He explained that one of the problems with capital is its inability to be easily transferred. This inability can spell disaster to a business in a volatile economic environment.
Now in English:
Let’s say I decide to invest in building boats. I invest thousands in machinery, raw materials, and manpower hoping to get a profit. Now, after I spent millions trying to build boats, someone invents tiny hovercrafts that hover above water. No one wants to get wet anymore and my boats become completely useless. So I default on my loans, file for bankruptcy and end up penniless looking for a new business venture. Maybe I’ll make tiny hovering plains. But then the next year I find out that using small hovercrafts causes cancer. The hovering system used a terrible chemical and the entire system becomes illegal. Now boats are in high demand. Unfortunately for me, I had to break all the ones I made into scrap to try to repay my debt. Now I’m broke again.
Imagine that we decide to tell the exporters to go fly a kite and let the market work it out for them. They become less profitable and investors move their money to other businesses such as pharmaceuticals where they can get a better return on investment. The import / export companies fire thousands of workers and the pharmaceutical company begins hiring and training. Now, a year later, the dollar gets stronger and investors move their money back. The pharmaceutical companies have to fire thousands of workers and the import / export businesses begin rehiring and training. Both firms wasted millions, if not billions, due to the turnover they suffered because of the fluctuation in the dollar. In a few years, both of these industries will be considered too unstable and no one will want to invest in either of them.
And so, our government is doing what it can to try to make these businesses a bit more stable. They cannot stop all fluctuation, but by using a couple of monetary tricks, they can help the import / export companies ride out the boom – bust – boom they expect to see in the American economy and the dollar.
So that’s our financial crisis in a nutshell. In some of the coming posts I plan to discuss some of the repercussions of this crisis and how it affects our everyday lives.
What do you think?
PS – If you’re wondering, Eugen von Böhm-Bawerk is pronounced Oygen Bom Boverk
Haaretz has a fantastic article explaining the real issues behind the current housing crisis in Israel. The piece, written by the CEO of Psagot Compass Investments, explains the rarely heard economic side of the issue
“Five years ago, in the summer of 2005, an investor bought an apartment for rental purposes: a small studio apartment in a new building but in an unattractive, congested area of south Tel Aviv. He paid NIS 430,000, using his own savings rather than taking a mortgage. At the time he could expect to rent it out for from NIS 2,400 to NIS 2,500 a month. Rental income of NIS 30,000 rent a year on an investment of NIS 430,000 translates into returns of about 6.5% a year. Israeli government fixed-income Shahar bonds would have yielded roughly the same return, in nominal terms.
Investing in property isn’t like investing in government bonds. Like every instrument of investment, it has both benefits and drawbacks. On the minus side are the headaches of being a landlord, the risk of getting stuck with a bad tenant and occasional expenses.
Unlike nominal bonds, however, rents and home prices tend to keep pace with inflation, and up to a certain threshold rental income is not taxable. Capital gains from bonds are taxed. In any event our man went for the property, not the bonds.
Five years later, where are we? The monthly rent rose to NIS 3,000 a month, representing an annual increase of around 4.5%, or between 20% and 25% over the five-year period. That wasn’t a meteoric pace, it was roughly the same as inflation.
But the purchase price is another story altogether. Similar apartments sell for NIS 800,000 today, meaning it rose by by 80% in five years, far outstripping the increase in rent.
In 2005 the return on investment was the same as nominal government bonds. Now the equation is NIS 800,000 (apartment value ) divided by NIS 36,000 a year (rental income ), which works out to 4.5% – the same as the return on Shahar bonds. In other words, that didn’t change in the five years.
That, dear reader, obeys the laws of economics and financing. When long-term interest rates drop, the price of income-generating properties rises. The longer the lifetime of the assets, the more their prices increase. Those are the laws of mathematics. Since property has a long lifetime, its price rises significantly when long-term interest rates drop.”
Some points of interest:
1 – As one commenter pointed out, if this is true, then investors should buy properties when long term interest rates rise and sell when they are low. The opposite would be true for private individuals buying a home in which to live.
2 – As long as the US keeps interest rates low and we match it (in order not to drive up the shekel and hurt exports), then the housing bubble will likely continue.
3 – Regulations aimed at keeping people from buying homes (more money down, stricter requirements, higher interest rates) will likely remove the buyers that are buying to live in the homes (and are paying via mortgage) but not those who investing (and often have the money up front via a mutually fund of some sort). As a result, there will be a small dip in price, and then a rush for more investors to push into the market, probably inflating the bubble more before it bursts harder.
Do you think the government can do anything to fix the solution or just make it worse?