Homes prices in Israel are unquestionably among of the highest worldwide when looking at price per square meter. In Israel, the middle class sector is shrinking every day, creating huge polarization in the economy. What is so alarming is that there is no correlation between the prices of a home/apartment and average annual wages.
The average 4.5-5 room (3-4 bedroom) apartment, say 120-150 sq.m. in Tel Aviv costs about $850,000. Typical loans are 75 percent of the total purchase price, provided your monthly mortgage payment is no more than one-third of your gross monthly income. According to recent statistics, the average Israeli family in Tel Aviv earns $52,038 (the median family income in Israel is $47,136) so if you divide that over 12 months you get $4,337 per month. If I were to take a third of this income that means $1,446 per month is the maximum amount one could use to qualify for a bank loan.
A mortgage of 75% of the purchase price is $637,000, that in today’s market would bear interest at 4% per annum, due in 20 years, equates to a monthly principal/interest payment of $3,900. This mortgage figure far exceeds the amount a bank would approve based on a typical family income in Tel Aviv, so the only way to make this work is to increase the down payment and take a much smaller loan.
This means that someone must come up with a down payment of $600,000 (71% of the purchase price) to allow a typical family from Tel Aviv to support a monthly mortgage of not more than $1,500/month. How in the world can someone garner up such a huge amount of money when families are struggling so hard, barely making ends meet each month even with two breadwinners?
And really, most Israeli families are over extended in bank credit because they do not have enough income to pay the bills each month. Basically, due to the extremely high cost of living and lower salary levels in Israel, a typical family is unable to set aside money because there is no money left over. So, the $64,000 question is: who comes to the rescue to give the family/individual the $600,000 down payment? As you see, the numbers don’t add up and make no sense.
But really this is not the answer. In the US, the math works just fine today where income is directly related to the mortgage and price of a home. Of course when lending institutions were overzealous loans were made far in excess of what people could afford. In many cases buyers didn’t even have to give a down payment nor were they required to prove their earnings. Those homeowners lost their homes through foreclosure and are now renters.
Now, US lenders have revamped their lending practices where borrowers must demonstrate historical/current proven income to support the monthly mortgage. US lenders have gone overboard and the conditions to obtain financing for a home are so stringent that many cannot qualify, which is stifling the home sale market.
The Israeli government is now thinking of amending its housing ordinance to include affordable housing. This is a step in the right direction. But if you look at the US, they have been very progressive to provide affordable housing for many years. In California, most cities require developers to set aside 10%-25% of the total project for affordable housing as defined under strict financial guidelines.
In such circumstances, developers are granted higher density to offset this cost. If you look at HUD (Housing Urban Development), they have been operating for years in this space providing affordable housing programs to those that qualify both in renting and for-sale housing. Then there is also the Veterans Association (VA) to cover war vets. This list goes on.
In certain cities in the US, like San Francisco and New York, cities have opted for having a rent control ordinance. This in effect controls the market rate rent when a unit goes to market and restricts the annual rent increases for existing tenants based on a specific formula. Both cities implemented a rent control ordinance to keep rent affordable and within the means of a renter.
In California, architects have been very progressive to create efficiently designed first-time buyer starter homes. In one project located in Sunnyvale, California, the developers, W.E.B Sunnyvale Homes LP, whose general partners were myself and Kyung Yoon, a prominent Korean businesswoman, were able to get city approval to increase the zoning from 15/DUA to 35/DUA, classified as high density, by providing a unique, well-needed housing project catered to first time home buyers.
We overcame fierce objection from the neighboring condominium association and endured a long approval public hearing process with city officials. The project consisted of 45 attached townhomes, what we call in Israel duplexes. There were two floor plans: a one- and two-bedroom plan. The one-bedroom was 65 sq.m. and the two-bedroom 102 sq.m. The base footprint was 20’ x 20’ on a lot size of 60 sq.m. Each home came with its own private car park.
This project was conceived in December 1991. At that time, the homes were priced from $149,000-$189,000. Keep in mind that the State of California offered first-time buyers the opportunity to obtain below-market rate loans for 90% of the purchase price.
Even with a 90% loan, the mortgage payment was almost equal to rent for a new one- or two-bedroom apartment. This housing project was in-fill and located on a major thoroughfare situated in back of a carwash. In Israel, townhome plots are not less than 300 sq.m. – a far cry to maximize the optimal usage of land. Tel Aviv’s answer to affordable housing is to construct a 32-story tower and to sell a 4-room (3-bedroom), 100 sq.m. apartment for close to $1 million!
One other profound architect from San Francisco who has won numerous awards for his unique designs for starter homes is Donald MacDonald. In 1988, he came up with a starter townhome cottage consisting of 30 sq.m. in San Francisco that cost $12,000 to build (excluding land). The home had a base footprint of 17’ wide x 14’ deep.
Since 1984, MacDonald was developing these in-fill projects where he sold them for $115,000-$120,000 and rented for $650-$800/month – far below the median home price. In relative terms, rent at that time equaled the mortgage payment assuming a 75% mortgage. Since this time, MacDonald and other architects/developers have built numerous housing projects achieving similar results as MacDonald.
Basically, Israel needs to adopt these novel approaches to create affordable/starter homes. Housing prices and rent are becoming more and more difficult to attain for young couples. In Israel’s case, the government owns over 90% of all land, so it is certainly within its control to find many creative solutions to assist buyers and renters to make housing affordable.
There is no economic justification for the outlandish home prices in Israel. Certainly in places like San Francisco and New York, homes prices are terribly high – but earnings and income are far greater, and there is a distinct correlation between the home price and income. In Israel, this is not the case.
In 2005, median family income in Manhattan was $188,697, and the average median home price in Q1 2013 was $1,100,000. In 2010, median family income for San Francisco was $85,778, and the average price of a home for Q1 2013 was $833,750 – almost equal to Tel Aviv. The numbers in Israel make no sense and do not support such insane price levels.
What makes Israelis so special is their sense of commitment to family, assisting their newly wedded children with the purchase of their first apartment by providing if not all the money in cash or a hefty down payment (say for a new apartment in Tel Aviv translates to $230,000). Home ownership in Israel is 69% compared to 65% in the US only lends further support to this notion. Can you imagine if families didn’t do this? What would happen to home prices? No doubt they would revert back to a place that keeps these ratios in line, as they are in the US.
Ron Diller lives in Israel and emigrated from San Francisco.