The rate of growth of households in Israel is 2.1%, or roughly 53,000 new households each year. To meet their housing needs in a country where construction for rentals almost does not exist—everybody has to own an apartment when they get married—the market needs to build more than 13,000 apartments each quarter. It’s a steady and rigid demand, and things go badly when supply fails to meet it.
According to an Israel Hayom report on Wednesday, things have been going really badly.
Finance Minister Moshe Kahlon (Kulanu) has spent his tenure so far doing war against private investors in luxury apartments, raising their taxes disproportionately starting with the third apartment. In the best tradition of Bolshevik social engineering, Kahlon expected Israeli developers to replace the lost money from luxury buildings with his soviet-style plan for cheap, low-amenities housing construction with tenders given to the bidder with the lowest final price to the tenants.
The Housing Ministry’s new housing program has so far received restrained praised. People who win the lottery often give up their option because they hate the boxed dwelling. It’s 2018, young people want more than a couple of walls with a kitchen. Investment money meanwhile prefers the easier and more lucrative markets abroad, and Israeli developers follow it to Berlin and Toronto.
And so the Finance Ministry, which set a goal of building 60,000 new apartments a year to cover the gaps created in past years, is looking at a market with a drop in construction starts to a low of 9,000 apartments in this quarter, and the end of the decline is not in sight.
A similar phenomenon was observed at the peak of Yair Lapid’s tenure as finance minister, when he called in April 2014 for young people not to buy apartments because he expects prices to fall – effectively freezing the housing market.
When Lapid was fired by Netanyahu, the market recovered. The big jump in building starts occurred during the period between Lapid’s dismissal in December 2014 and Kahlon’s entry into the Ministry of Finance in May 2015.
It took the market a little more than a year to figure where Kahlon was headed and since the third quarter of 2016 there has been a 40% free fall in building starts in Israel.
At this point, the real estate market is expecting the stunted supply to start pushing up prices, since demand continues at its steady pace. As soon as prices go up, there will be a positive movement in housing starts – with the very people Kahlon wanted to help now paying through the nose.
But between the prices hitting the right point and the market providing new apartments there’s between two and three years of construction, from permits and designs to handing the happy couple the keys. And many harmful things can happen then – all of them the result of a Bolshevik minister’s social engineering.