In my last article, I addressed how housing prices in Israel are unsubstantiated compared to other cities like New York and San Francisco where there is a gross disproportionate imbalance between family income and the price of the home. We found that a typical home in Tel Aviv will require the buyer to bring 65% of the funds from his own sources with the balance from bank financing. This is because the average salaries in Israel could only support a bank loan of 35% of the purchase price. This is totally absurd. Who on earth in Israel can save up this huge sum of money when the salaries are less than half of that in the U.S. when comparing apples to apples. The typical down payment for homes is between 5%-25% of the purchase a home –a range in striking distance.
One of the solutions of how to provide affordable housing is for local governments to place mandatory restrictions on all approved housing projects to set aside a minimum 10%-15% of the housing units for affordable housing. In order to offset this cost, cities generally allow the developers to have higher density than what is allowed under the zoning ordinance. In cities like Sunnyvale, located in the San Francisco Bay Area, they have a long standing program that allots 10% of all multifamily units be designated as “Below Market Rate” (BMR) that are actually given over to the housing authority of Sunnyvale whereby the city sells the home to families of median income and who meet a stringent set of financial requirements.
The U.S. government has many affordable housing programs – I will address only a few and show how this can be incorporated into Israel.
HUD (Housing Urban Development), a department of the federal government, offers many programs for families of low to moderate income levels. The most prominent program called Section 8, is managed by the U.S. Department of Housing and Urban Development. This program provides financial relief to low income families through issuance of vouchers more commonly known as “the Housing Choice Voucher” program which pays a large portion of the rents and utilities of up to 95% of the rent for about 2.1 million U.S. households. However, this is predicated on renters having family income levels ranging from 50% to 80% of the lower income limits of the median income for the county or metropolitan area where the home is located.
Section 8 also authorizes a variety of “project-based” rental assistance programs, under which the owner reserves some or all of the units in a building for low-income tenants, in return for a federal government guarantee to make up the difference between the tenant’s contribution and the rent in the owner’s contract with the government. A tenant who leaves a subsidized project will lose access to the project-based subsidy.
HUD and the U.S. Department of Veterans Affairs (VA) have also created a program called Veterans Affairs Supportive Housing (VASH), or HUD-VASH, which distributes roughly 10,000 vouchers per year at a cost of roughly $75 million per year to eligible homeless and otherwise vulnerable U.S. armed forces veterans. This program was created to pair HUD-funded vouchers with VA-funded services such as health care, counseling, and case management.
The Federal Housing Authority (FHA) have been around since 1934 and is a part of HUD. FHA will finance up to 96.5% of the purchase price of a home representing a 3.5% down payment. FHA Loans are currently running around 3.625%-3.750% for a 30-year fixed rate mortgage. Then you’ll have to add mortgage insurance which can be another .50-.70 basis points that has to be added to the interest rate altogether equals 4.13% to 4.45%.
These are only a few of the U.S. federal government programs available to assist homebuyers or renters to make housing affordable. In Israel, the State of Israel, through the Israel Lands Authority, owns and manages approximately 97% of all lands comprising some 19.5 million sq. meters of land. This makes the process much easier as land in Israel represents around 50% of total costs when constructing an apartment building. In the U.S., they don’t have this luxury and these programs are funded entirely by tax payer dollars.
With this immense asset base, the government could leverage the land and float a 30-year long-term bond whose funds will be used to provide financing up to 97% of the purchase financing as for low to median income family households. This will avoid having to increase taxes. If the Israeli government removed the cost of the land, this would reduce the price of the apartment by 50%. On a macro-economic picture, the government could set aside a certain percentage of land in each city that will be designated for affordable housing and to adopt specific ordinances.
Of course in order for this to be effective, it’s essential that all housing be close to public transportation and jobs or else this will defeat its purpose. If we say the average apartment in Tel Aviv costs 2.8 million Shekels and if the land price is omitted, that cost of the apartment is now 1.4 million Shekels to the new buyer. If the current average per capital income in Israel is 19,653 Shekels per month means 6,650 Shekels can be appropriated toward the mortgage. Under this example, if the State of Israel funds 97% of the purchase price as a 30-year loan secured as a first deed of trust against the property, which in this case would equal 1.358 million shekels earning a fixed rate of interest of 3% per annum, would mean the monthly principal and interest payment would be 5,600 Shekels per month, is well within the financial limitations. So, the actual down payment required in order to purchase a new apartment under this new proposed scheme would only be 40,700 Shekels ($10,175) a far cry from the current 65% required for a down payment to buy an apartment equating to a sum of 883,000 Shekels ($221,000). Of course such programs would also fuel the economy so this becomes a win-win situation for everyone.