In Israel, as in Australia, the words ‘housing crisis’ are often front page and centre in the local press.
Meal table conversation for a number of young singles and families in Jerusalem, the West Bank and around Tel Aviv, often turns to the challenges they face to gain a toehold in the local housing market. Comparing their experience to Australia makes for an interesting counterpoint.
To set the scene, a few key statistics are important. With a population a third of Australia’s and without the benefit of our resources, Israel has become an economic powerhouse based on its intellectual and technical output. In the difficult situation of having to spend over double what we do on defence as a percentage of its budget, it invests almost the same percentage as us on education and is on par with Australia in health expenditure per capita, which is impressive given that it has two and a half times the fertility rate of Australia.
GDP per capita in Australia is over $51,000 to Israel’s $35,700. Israel has a lower unemployment rate (4.6 per cent to 5.5 per cent). According to the OECD, growth there has exceeded most other OECD countries’ rates for more than a decade. Employment is rising, inflation is low, the external surplus is comfortable, and the public finances are in relatively good shape.
Critically for housing affordability, however, Israel’s average wage is about half of Australia’s. This relativity applies for highly qualified professionals as well as for blue-collar workers
There has been a sustained housing construction boom in Israel, as there has in Australia. The population growth rate in both countries is similar.
On top of the price and income disadvantage for Israelis in this above comparison, since 2012 an Israeli buyer must cope with raising a minimum housing deposit of 30 per cent for owner-occupiers (25 per cent for first home buyers), and 50 per cent requirement for investors. In response to an overheated market, Israel implemented strict measures to reduce risk from surging housing credit growth and house price appreciation. The measures were intended to reduce banks’ exposures and lower demand. Needless to say, for most young Israelis, these hurdles are an impossible burden, far more onerous than Australia, where home buyers only have to raise a 10 per cent deposit.
As with the debate in Australia, the question of whether such regulatory measures work to control prices, when at the same time population is surging, is moot. Certainly from talk around the dinner table, the impression from struggling families there is that top down regulation only exacerbated the problems they face.
According to US think tank the Milken Institute in a 2014 report Toward Affordable Housing in Israel, “Israel is experiencing significant failures in its housing market. A dramatic increase in housing costs over the past five years has outpaced the rise in average household income. There are too few apartments for rent or purchase, and working families cannot compete in the current apartment market.”
Sounds familiar to us doesn’t it?
As Australia grapples with the political backlash from struggling young singles and families trying to get into the market, Australians have heard some ridiculously self-serving ‘solutions’ from industry and government. The greatest misdirection has been an exhortation to increase supply, as the best way to moderate price growth.
The following graphs from a 2014 BIS Schrapnel report on the housing market show prices vs commencements in Sydney and Melbourne:
Capital city construction produces perhaps at best, a two per cent increase on existing housing stock year on year. Overwhelmingly, most sales in the market are established properties. New stock is of nowhere near sufficient quantity to really have an overall market price effect. As you can see by the graphs above, actually supply and price seem for the most part to be in sync with each other.
Strikingly, this supply/price correlation is quite similar in Israel.
Israel, unlike Australia, operates within a tightly state-controlled land release environment. Their government, through the Israel Land Authority (ILA), controls the price, availability, and associated public development costs, for 93 per cent of Israeli land.
This effectively stymies the sort of market-led growth of new residential development we are used to. Over 50 per cent of new construction there takes place on land sold by the state for that purpose. In the West Bank, the proportion is much higher. Recently, new releases have been limited by the government’s affordable housing plan for sale to first home buyers only. The side effect has been to create premium prices for privately held land.
Any developer in Australia knows the frustration of navigating our planning approval processes where a five-year turnaround is par for the course. Pity the Israeli developer, though. The complexity of implementation in building projects there adds substantially to the length of time needed to deliver a project, according to the Deshe Institute. It can take 10 to 12 years for project approval and development, said Amir Peled of the Construction Contractors Association, particularly for projects in urban areas.
In the arena of housing affordability, simple government solutions are probably no solution at all – and can simply serve to create more problems downstream. The answer to affordability is not as simple as say, removal of negative gearing. According to the Milken Institute report, “the housing situation is complex. It involves issues of housing policy, program development, land use, banking and lending policies, and barriers not just to direct investment but also to public-private partnerships that leverage public funding with private capital. The solution lies in stocking a ‘toolbox’ that includes novel applications for reliable financial instruments, and for uniting market-, community-, and policy-based approaches to bridge the gaps between housing costs and supply.”
Australia must address not simply affordable house purchases, but also affordable rental housing. When the government scrapped the NRAS scheme, it removed a very effective tool from its own toolbox. According to Nicole Gurran, an urban planner and policy analyst from the University of Sydney, more public housing provided by the government – call it ‘social housing’ – which could be provided by non-profit community housing organisations, is a vital part of the safety net needed in Australia. In comparison to the rest of the world, Australia rates very low on our now degraded stock of viable alternative affordable rental housing.
In Australia, only about four per cent of people get access to subsidised housing. Whilst Sydney may be the 18th most expensive housing in the world, Hong Kong is the third. However by contrast, in Hong Kong, about 45 per cent of people live in subsidised rental or low-cost home ownership that’s been provided through a public housing scheme.
Many countries around the world have current housing affordability issues. Australian families arguably have a lower bar to cross to get into ownership than their Israeli counterparts. However, the current debate is really about what sort of country and society we want Australia to have in future. We should be thinking about our children and their children as we debate the complexities of future housing affordability policy.