The Mission – Creating a free market in residential and commercial property in Israel.

The Problem

Israel’s real estate market suffers from a complex and perverse set of tax and regulatory constraints that suppresses supply and distorts demand. While all property is affected by these distortions, several factors intensify the impact of these constraints on residential housing. Perceptions of high residential real estate prices have become a potent political issue. Residential apartment prices rose by over 30% from 2007-2010, during a period of when real estate prices collapsed in international markets. Most families cannot afford to buy a home in the “central area” of Israel, the coastal zone from Ashdod to Haifa where most people live and most jobs are located. To top it all off, Israel lacks a commercial rental housing sector.

Current Law

The Israel Lands Authority, a state agency, controls 93% of Israel’s real estate. Most land for construction must be leased from the Authority, which, for political and bureaucratic reasons, has held most eligible realty in reserve. Even when the Authority leases land, it puts severe constraints on the use to which the land is put. An entirely different set of constraints to building is imposed by the Planning and Construction Law, which gives multiple local, regional and national players (ministries, planning boards, local authorities, etc.) the ability to delay or veto land development. In contrast to the United States, any building activity of even the most trivial kind (as one Israeli Supreme Court case put it, every “nail in an external wall”) requires a regulatory permit. Moreover, extensive areas of Israel lack any approved plan, meaning that construction must be preceded by a multi-year or multi-decade bureaucratic process. Much agricultural land lies near high-demand areas, but a set of court rulings in the 1980s severely limits the ability of the Lands Authority to permit the property to be rezoned for residential development. The Bank of Israel uses its regulatory authority to ration credit to the real estate market, helping prevent a US-style housing market meltdown but also contributing additional constraints to the housing market. A generous tax exemption for capital gains from the sale of residential units artificially boosts demand for expensive units.

How It’s Done in Other Places

In most developed Western countries the vast majority of commercial and residential land is privately owned. In the United States, most zoning regulation is local and phrased in general terms: developers may build anything not specifically prohibited. By contrast, Israel’s planning and development regime was largely adopted from Britain’s. UK Prime Minister David Cameron has identified the UK planning system’s constraints on real estate development as a primary barrier to the recovery of the UK economy and has called for extensive reform. Of course, there is nothing in Britain to compare with Israel’s centralized system of land ownership.

Possible Solutions

There is no single fix for a problem created by layers upon layers of conflicting regulation. Critical data required for understanding the problem are not available. Among the objectives market-oriented reformers agree upon:

• Get land out of the grip of the Lands Authority and into the hands of private owners and developers.
• Simplify or bypass planning and building regulations so as to reduce planning authorities’ ability to arrest or delay projects. This would obviate private developers’ tendency to delay construction while negotiating and renegotiating their building plans.

Kohelet’s Recommended Solutions

Kohelet is pressing forward with a wide range of initiatives which, cumulatively, should break up the housing logjam and move Israel significantly toward a privatized real estate sector:

• Legislation to require the Israel Lands Administration to determine, within two years, which of the lands under its control are to be reserved for future public use (such as parks, military training grounds, main infrastructure installations, etc.), up to an upper limit, perhaps 60% of all lands under its control.
• Transfer all land not zoned for public use to municipalities.
• Make elected municipal councils the chief planning authority within their areas of jurisdiction; eliminate current bureaucratic regulation which require their decisions to be approved ex ante by various government ministries, state planning officials, and their own legal and civil engineering advisers. Currently these advisers answer to state planning authorities, not the the local planning councils who pay their salaries and whom they ostensibly work for.
• Transfer all other lands not designated for public use–a large amount–to the Housing Ministry for zoning and marketing.
• Legislation reducing the planning delays by allowing builders to legally construe excessive regulatory delays as authorization to build.