19 Dec 2012  Research & Ideas

Affordable Housing: Israel and the United States

At a recent conference in Herzliya, Israel, Nicolas P. Retsinas, John H. Vogel, and Charles S. Laven joined residential developers, non-profits, national and local government officials, and academics to brainstorm approaches to affordable rental housing.

 

Housing costs too much for working-class families. Young adults are forced to live with parents, or cram together. Households spend more money on housing than they can afford. For Americans, the news is depressingly familiar.

Israel, a land that outsiders see only as war-torn and war-locked, besieged with global discord that threatens regional peace, faces the same domestic headlines. In 2011, when young Israelis—and extending eventually to not-so-young Israelis, fueled by Facebook—mounted a "cottage cheese rebellion" to protest the rising costs of basics, those basics segued to include housing. Returning veterans could not find affordable homes. A condominium costs 12 times annual income; and the country has a dearth of rental units.

In Israel, demand for housing outstrips supply—a conundrum familiar to United States housing advocates. In Israel's case, absentee owners of "ghost" condominiums, coupled with immigration, fuel the demand.

The supply of housing is limited, due to the topography of the nation, the need to live near jobs, and the fact that the government owns 90% of the land. Add to the Israeli conundrum the segment of the population dependent on the government—the religious groups that do not work, but whom the government subsidizes. The nation has no large industry of rental housing, nor does it have the rental-constituencies of the United States: the people living in, profiting from, concerned with rental housing. Since investors can earn more from shopping malls, they have shown little interest in building affordable apartments. Government policies have favored home ownership, and today's interest rates are low. Finally, the rising prosperity of Israel has exacerbated prices, as people have bid up the costs—with the prospect of a bubble on the horizon.

As in the United States, the high cost of housing can undermine economic competitiveness as young families move farther and farther out, spending more time and more money on housing.

If the reasons behind the headlines are unique to Israel, the approaches echo those of the United States. At a recent conference at the Gazit-Globe Real Estate Institute of the IDC in Herzliya, we joined residential developers, non-profits, national and local government officials, and academics to brainstorm approaches to affordable rental housing. Here are some of the approaches bandied about—a list of governmental "coulds":

  • Sell land to developers, but with restrictions. Developers, in Israel as in the United States, expect to make a profit—as much of a profit as they would from non-housing investments. So the government could tie affordable housing to the deal; for instance, the government could discount land prices, tying the discount to a developer's provision of affordable units. We do that here.
  • The government could raise density, allowing developers to build higher—while reserving a percentage of units to be rented at affordable rates. Again, we do that here.
  • Israel has publicly-built, publicly-administered "public housing," with rents set low; but, as in the United States, many of those units have aged poorly and are poorly maintained. Given high land values, the government could raze or rebuild, allowing mixed income developments. Another familiar approach.

And there is the public-transit link: the government can construct high-speed rails to move people from cheaper housing to big cities, a project underway in Modiin. (The United States, while voicing support for high-speed transit, has not invested much in it.)

In Israel, as in the United States, the approaches are reasonable. The task is to translate a theoretically reasonable approach into a workable policy. Implementing any of these approaches will require negotiations between the federal and the local governments, to decide whose responsibility, fiscal and administrative. It will require legislation. It will require consensus on land use, on subsidies, on taxpayers' burden, on developers' rights. In the United States we started those discussions fifty years ago, and we are still discussing.

Israel—even while trying to negotiate its place in the region—is also trying to negotiate its way to affordable housing.

About the authors

Nicolas P. Retsinas is a senior lecturer at Harvard Business School.
John H. Vogel Jr. is an adjunct professor at the Tuck School of Business at Dartmouth.
Charles S. Laven is an adjunct professor at the Graduate School of Architecture at Columbia University.

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Comments

    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Man's basic needs are food, clothing amd shelter. Cost escalation in each is very high. Percentage-wise it could match but since housing is high cost item, even a reasonable hike leads to awesome figures. As in Israel, so in other countries and,by and large, similar situation. With rising population, land, which is non-variable, has got to face pressure. In addition to the measures suggested, stress on having small tenements in large numbers and not permitting the rich people to make huge palatial lodgings most of which remain unoccupied could help.