Israel's apartment lottery may play with fire amid uncertainty in the housing market

Mahmoud Illean | Corbis | Getty Images

Israel will hold a lottery starting Saturday night (17 June) to sell 15,000 apartments at reduced prices under a program to help ease starters into the housing market. The move comes amid signs that the rise in house prices in the country is flattening out and has been criticized for having little immediate practical impact.

"I estimate that we're talking about a completion period of between four and five years. All these offers need to pass regulatory processes and so on," said Israel Builders Association Chief Executive Eliav Ben Shimon. He added that many of the apartments will be located in the less desirable 'periphery' while high-demand areas, such as the center of the country will face shortages.

Housing shortages and high prices are a politically explosive topic in Israel ever since social protests over the cost-of-living erupted in 2011. These were driven to a large degree by the difficulties many people experienced in the housing market. Since then, successive governments have vowed to tackle the problem.

Prices are now stabilizing, says Ben Shimon, with the house price index dropping 0.5 percent over the last few months. But until the end of the year, the association expects prices to rise overall, by some 3.5 to 4.5 percent.

"Of course that's a much more modest pace than in previous years when we saw annual increases of 7.5 or 8.5 percent," says Ben Shimon. "So, it's a significant slowdown in the pace of price increases but it's still an increase."

The program under which the 15,000 units are marketed provides buyers who're starting out in the housing market with discounts on market prices. Finance Minister Moshe Kahlon

was quoted in Israel's Globes financial newspaper as having said at the announcement of the new lottery on Wednesday (14 June) that to date 10,000 people had won the right to such discounts and more will follow. "The housing market has cooled off because young couples see that it's coming," he said.

The program comes together with other government measures to reduce prices, including a mooted tax on third homes and over to deter investors, which is still caught up in the courts and the legislative process.

One prominent critic of government policy on the subject warns that such measures at a time when prices are already showing signs of falling can lead to a rout in the market. "They take steps to curb the market but if the market is starting to fall, it will exacerbate the fall," says Elli Kraizberg of Barl Ilan university's Graduate School of Business Administration and a co-founder of Israel's Midroog rating agency, which is affiliated with Moody's.

He says that investors are better off staying out of the market, for now, to see where it's going. All signs point to what he calls a "downfall", if not now, then in the near future. The cooling off of the market is mostly driven by the rise in mortgage interest rates, not government policies, he estimates.

But the situation can get critical if the government doesn't change its ways: "Now when you find that the market is starting to fall, to prevent a 30 percent fall in the market, they should take steps that are the opposite of what they're doing."

Israel's economy relies heavily on the real estate market, he points out, saying that it represents some 40 percent of wealth in the country and 19 percent of GDP. The banks are well funded at the moment but may face problems if house prices were to drop by more than 25 percent, says Kraizberg.

One researcher, who tracks the housing market and economic and social conditions in Israel, says that the country has to address fundamental problems if it is to solve people's difficulties in finding affordable housing.

"The problems that are causing the housing issue are very highly related to the problems that are causing high rates of income inequality, and low rates of productivity," says Dan Ben-David of the Shoresh Institution and Tel Aviv University's public policy department.

He estimates that it will take large investments in infrastructure and education to ease the problems. Current government policy is ineffective he says: "They cost the government a lot of money in all kinds of tax benefits and all kinds of subsidies when eventually they end up benefiting the investors anyway."

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