Economist Warns Kahlon Plan Will Raise Housing Prices

A view of Tel Aviv from atop a high-rise currently under construction.  (Nati Shohat/FLASH90)
A view of Tel Aviv from atop a high-rise currently under construction. (Nati Shohat/FLASH90)

Minister of Finance Moshe Kahlon’s plan to end the housing shortage and make affordable housing available to the average Israeli will only make matters worse, according to former Ministry of Finance chief economist Michael Sarel.

The proposed lowering of land and housing prices through buyer fixed prices will increase demand for housing and drive prices up, Sarel contended in an interview with Globes published on Monday.

The economist also warned of the danger of a bubble in the housing market.

“I’m very worried about housing prices and the macroeconomic effect of a drop in housing prices. From a historical perspective, housing prices are very high, especially in Tel Aviv. When you compare housing prices to per capita GDP and population density, you find that they are far higher than in important cities around the world. The ratio of mortgages to total credit is also relatively high, so you can see that there is a bubble.

“I don’t think that it’s a huge bubble like it was in the U.S. in 2006, but it’s not far from that. There’s therefore no doubt that housing prices will fall. The question is whether it will be slow and gradual, as it was in Israel in 1997-2007, or a 40% crash like in the U.S. in 2006-2009. Measures are therefore needed to moderate the expected drop in housing prices.”

“The question is whether to simultaneously pursue a policy that further increases demand and the bubble in real estate prices — such as subsidizing land prices, zero percent VAT, or a buyer fixed price — all which increase demand and inflate the bubble.”

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