Is Israel in the midst of a house price bubble? According to the BloombergTV clip at this link, Goldman Sachs sees Israel as the most likely OECD country to see a crash in house prices. Israeli Finance Minister Yair Lapid sees things differently. His soundbite suggests that expensive housing is largely a function of constraints on the supply of housing.
I tend to agree with Finance Minister Lapid: There is no housing bubble in Israel. High house prices there are likely to stay high for the foreseeable future, and are unlikely to crash anytime soon.
The problem there is the classical one, boiling down to three policy choices:
- The Israel Lands Authority, which owns most of the land in the country, puts extreme restrictions on the supply of land for housing.
- Municipalities and regional authorities constantly refuse to allow lands to be converted to urban use.
- Finally, restrictions on floor-area-ratios (FARs; the ratio of a buildings total floor area to the size of the plot of land on which it is built) limit what can be built even if a developer manages to get a plot of land.
The problem has been there for decades. Tel Aviv has recently managed to remove its strong FAR limitations by simply not approving any statutory plans that bind the municipality.
So the BloombergTV report gets it partially right: Prices are shooting up faster than ever. There is high demand for housing, abetted by people living abroad buying pied-à-terres in Israel. And interest rates are low. But that has little to do with the sad fact that housing in Israel is no longer affordable to the great majority of middle class people.
The solution for Israel is simply relaxing its harsh policy of restricting land supply, coupled with opening up new lands with new investments in infrastructure that will enable people in the center of the country, where most everyone lives, to commute quickly from one place to another. This needs to be supplemented with more liberal FAR allowances. Only the opening up of the land market is likely to work in the medium and long run. And it will take time for the market to reach an affordable equilibrium.
Tile image courtesy of Jeff Myers.