The real estate lifelong trap for the common man

It doesn’t matter whether a left or right wing government is in power as no government is interested in lowering the property prices in Israel and across the capitalistic world. Building constructions in Israel is down 25% since the war started. But this has been the quick solution to stabilize housing prices against a falling consumer demand. Yet it is not in the government’s interest to reduce housing prices instead.

The common man still can’t buy a new house. I had read analysis that said that the minimum salary for a 1.8 million shekel house in the center is now 21,000 shekels salary and 500,000 shekels in savings. The type of people that fall in this category – maybe hi-tech job holders, businessmen, some senior managers and sales executives. How long will young couples wait for handouts from their parents to buy a home? What happens to those young couples who don’t enjoy that privilege of free handouts? What will happen to single mothers, orphans, divorcees from violence, widows/widowers, our soldiers, our police? We have not even gotten started on the disadvantaged sections of our society. What will happen to the Orthodox Jews, too, where many couples are surviving on a single income?

A rental home in the center for the common family income costs up to 50-60 % of their monthly salary assuming a 3000-5000 shekels rental house. This money goes into the hands of an retail investor, investment company or realtor. This means that 15 days of the common man’s monthly salary goes into housing because of renting. Renting in an expense not an investment like the purchase of a house.

Salaried individuals work so that their employers make money. We earn a salary and then give up to 50% of that earned salary to a landlord (who also makes money) just to have a roof over our heads. What worries me is not the Tel Aviv rentals that start from 10k shekels a month and onwards. It is the entire central district and very soon the entire country (going by the rise in rentals in the north and south). Most of us will be stuck in this never ending maze of loans with some people taking 2-3 jobs to pay off their mortgage. Some statistics show that even Arab Israelis have 30% of their populations owning 70% of the properties. These numbers are similar numbers to the conspiracy theorists who say that 90% of the world wealth is control by the top 2%.

Gone were the days when rentals were only for new couples, students and people temporarily moving to the city/country. Mass production, economies of scale and high efficiency meant that everything in the world has become affordable from plane tickets, cars to the latest phones. However, one thing still continues to elude the common man in Israel and the world, that is buying a home. Mass production and economies of scale still haven’t hit the property sector in Israel and most of the capitalistic world. Banks would surely benefit from mass building production as it means higher number of housing loans with smaller ticket sizes which also means higher repayment ability of buyers to affordable homes. They would always prefer two individual borrowers borrowing half a million each verses one individual borrower taking a million shekels loan.

Mekhir Lemistaken has been a good solution to reduce the burden on the common Israeli. But it still doesn’t justify spending millions of shekels with loans to buy a basic home that takes up to 30 years to repay. Homes have become expensive but they have also been abused as an investment tool. Unlimited investor demand with limited and delayed construction has created this housing crisis for years. The only ones who benefitted from this meteoric and consistent price rise have been the existing home owners and investors leaving nothing for the common man and the our common future generations. I just wonder how my future children Bezrat Hashem and grandchildren will face this unprecedented crisis of rising housing prices.

Mekhir Lemistakhen now has a 7-year lock-in. For people who can’t afford to buy a house at these prices, even a 20-year lock-in seems acceptable as long as it further brings down the price of houses. Rising interest rates aren’t a friend of ours either but that’s just the nation’s economics and still acceptable. But they can’t justify the rising cost of housing and limited construction.

A solution would be to wipe out the waiting list of Mekhir Lemistaken which I can see that this government is now trying to do. Another solution would be to increase the Mekhir Lemistaken discounts on house purchases alongside adding higher lock-ins periods if needed. Couples who do get divorced or bankrupt and would want to exit before the lock-in period, can always have an exit clause of refund of principal-only from the house. Or a clause can state that the incremental profit from the sale of the house within the lock-in period is payable to the Government of Israel since these houses are not meant for speculation and investment but purely for housing. This clauses can come if houses are further discounted by the Government. What’s the point of the Government earning tax revenue from the sale of land and then spend it again on different reforms when buying a house/renting is one of the most painful problems of the common man.

When construction goes up, economies of scale in real estate will be reached. This will in turn reduce the cost of construction and fasten the business cycles of real estate businesses. Unlimited supply would mean that investment appreciation by shortage of housing will be eliminated. This in turn will trickle down to reasonable housing prices and shorter home loan cycles.

Israel has a good balance of capitalism and socialism with education and healthcare (the most hard pinching needs) being well socialized for the masses with a mix of capitalistic competitiveness. Its time that limited populations that need decent housing the most also come under this category. The ones who can afford are already buying and so are the investors. Its time for the common man to buy….but not at the cost of 50% of his/her earnings for 30 years. Everyone including me deserves to decide where our money goes and most of it shouldn’t go in property for much of our working years (much to the disappointment of the real estate industry). This is where capitalism must meet socialism at a common point. The rising housing prices are only a notional profit that is unrealized until sold. Its fine if the government wants to allow the prices to reach the roof but not at the cost of the common man who cannot afford a new house. The ideal family salary for buying a new home should be 6000×2= 12,000 shekels a month. Not 21,000 where it stands today to buy a 2nd hand or much older house in the center. With the exception of Tel Aviv and Jerusalem, it is harmful to the common man to sustain such housing prices in the country.

The solution also lies in high volumes and supply. Why isn’t the waiting list in Mekhir Lemistaken zeroed yet. Keep constructing houses face paced until investors don’t see real estate as an attractive investment and move to other investment alternatives. Today a shortage in construction makes prices rise and investments attractive with astronomical returns. Builders are blocking several floors in buildings for rentals only thus artificially escalating demand. With reasonable housing prices, would it be so bad if people succeed in finishing their home loans in 10 or 15 years? My brother in law once told me, that ultimately the home loan has to be repaid with interest from our own post tax earnings.

I dream one day of rentals being 1500-2000 for a 4 room house and maybe even low rentals for office spaces across the country. People who will stay on rent should only be those who dont want to buy a house and not those who can’t buy one. It’s obvious that if rentals will be lower for personal housing and office spaces, the benefit will always pass to the people and lower consumer prices. Lower prices means higher purchasing power.

The housing crisis is just like climate change. We can enjoy the present but unless we do something today, our future generations are in danger.

About the Author
A Zionist who did Aliyah from Mumbai (Bene Israeli Jew) in 2018. Adir is an MBA from the renowned Jamnalal Bajaj School of Management in Mumbai. He has been a politics, economics & finance enthusiast from a young age. From writing about current affairs in school to responding to news pieces of the Jerusalem post which were published. Adir has come a long way from India to Israel and kept pursuing his passions in finance, global politics, world macro economics, business news and issues that affect us all. He is a full time banker in Israel and a multi passionate soul.
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