The road to cheaper housing runs through Israel’s periphery

The answer to the high demand for housing is not more building in the center but a better transportation system linking the periphery.

Moshe_Arens_cropped-150x150By Moshe Arens

The bad news is that there is no magic formula to bring down the cost of housing. Not zero VAT, and not giving away land for free. The cost of housing is determined by market forces. The good news is that Israel in the past decade has become a wealthy country. As a result, the demand for housing by those who have the money seems almost insatiable. So look at the supply and demand curves for housing and you will see why housing costs are so high, and why they are not likely to come down in the near future.

In the Tel Aviv area the supply of housing is very limited. The area is one of the most densely populated on earth, and most of the land is already occupied by buildings dedicated to residential housing and commercial space. At any particular point in time, the supply curve is near vertical, with new building space being occupied no sooner than it becomes available.

And what about the demand curve? To a first approximation it is near horizontal. The demand gobbles up everything as soon as it becomes available. What is behind this insatiable demand for housing? In this wealthy country there are now many rich people buying up housing for themselves, for their children, and as an investment. Yes, also as an investment. As they see the price of housing going up year after year, buying up residences is rightly seen as a good investment.

But that is not all. There are plenty of buyers from overseas – wealthy Jews who would like to have an apartment in Israel. Believe it or not, they see Israel as a success story. And there is aliyah. Those now coming from France need housing and add to the demand. They are not all wealthy, and for some the high cost of housing in Israel presents a problem, but those who have the means buy residential dwellings. They are joined by those who have not yet decided to come but are thinking of coming in the future.

So there you have it. A very limited supply and an insatiable demand. This is not a housing “bubble” that will deflate sooner or later. There is real money behind the demand. And as the Israeli economy grows, so will the demand for housing, and housing in the center of the country stays out of reach for the average citizen. We are the victims of our own success.

There are numerous suggestions for increasing the supply of housing, like reforming the Israel Lands Authority and streamlining the process of providing building permits. All should be implemented, but as far as the center of the country is concerned moving the supply curve to the right is at best going to be marginal. The opportunities for providing housing at reasonable prices is in the periphery, north of Hadera and south of Gedera, in regions that have not yet been built up intensively, in areas where much of the land is still devoted to agriculture.

But the demand for housing is primarily in the center, near employment opportunities and close to everything that Tel Aviv has to offer. The answer here is not more building in the center but transportation from the periphery to the center. A transportation network that will decrease the time it takes to arrive from the periphery to the center. Although the railroads in Israel have been developed in recent years, there is much room for improvement. Are we ever going to see high-speed trains connecting the periphery to the center of Israel? When, if ever, will the center be served by a proper subway?

The solution to the high price of housing, unaffordable to most at the present time, is not building more housing in the center, but rather in shifting the demand for housing to the periphery by connecting the periphery to the center.

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