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Solving Israel’s Housing Crisis with US Cooperative Model

September 4, 2013
by Lawrence Gulotta
Tuesday, August 27, 2013
This article appeared on the Blog of  the Partners for a Progressive Israel:

A Matter of Housing Equity

Gentrification and housing affordability are contentious issues in Israel’s major cities.  The sales prices of apartments, and rental rates, have experienced a striking increase. The Jerusalem Post, no lefty newspaper, proclaims: “Homes prices in Israel are unquestionably among the highest worldwide when looking at price per square meter.”According to the Bank of Israel, the price of the average Israeli home has risen nearly 50 percent since December 2007 with rent prices also climbing sharply. Over the past year alone, apartment prices have risen 15 percent in some urban areas. The real estate bubble has created new and deeper social class stratification among Israelis, in an already polarized class structure. 
Only the wealthiest 30% of Israelis can afford to buy a home and take out a reasonable mortgage to do so, according to a Technion-Israeli Institute of Technology study by Drs. Danny Ben-Shahar and Yakov Varshavsky of the architecture and town planning faculty. 
This group qualifies at the currently institutionally accepted “loan-to-value ratio” (“LTV”) for a residential mortgage loan of no greater than 60% of the asset’s value.  The income to debt service plus maintenance costs ratio is not to be greater than 30% of the buyer’s income. The loan to value ratio is defined by the Appraisal Institute as “The ratio between a mortgage loan and the value of a property pledged as security, usually expressed as a percentage.” The equity ratio is defined as “The ratio between the down payment paid on a property and its total price” also expressed as a percentage.
The study found that half of Israel’s households could buy a home with a mortgage LTV of up to 80% of the home’s value.
A change from one third to one half, or a 34% increase.
The researchers also showed that working class salaries have not kept pace with home price increases over the past 20 years, 1991-2011.
They found that the average home price was equal to 51.7 monthly salaries of a person in the fifth decile; now the figure is 90.7 – a 75% increase, 1991-2011.
The study concludes, “…these findings show the need to consider far-reaching reforms that would drastically alter a households’ ability to buy homes.”
Contrary to the study’s recommendations, the Bank of Israel has tightened mortgage lending terms for loans greater than 60% of the asset’s value. The Bank has raised its reserves, to discourage mortgage lending. It has also reduced interest rates. The US interest rates and the Israeli interest rates for mortgage loans are moving in opposite directions (see schedules below).   In the US, a loan-to-value ratio of 60% would be considered a very conservative underwriting guideline. That being said, Israeli homeowners have maintained stronger equity positions in their homes than homeowners in the US and Spain. Underwater mortgages are not a mass phenomena in Israel, like in parts of the United States.
There are secondary markets in Israel for financing a home. First Israel, advertises, “Whether you are making aliyah, looking for an investment, or buying a second home in Israel,” call First Israel. “When purchasing an existing property or constructing a new one, First Israel provides mortgage financing up to 75% of the value of the home. Financing of up to 100% may be obtained for borrowers with equity in additional properties.” First Israel notes, “Obtaining financing for the purchase of a home in some areas of Israel can be difficult.”
The Bank of Israel appears to be lowering its interest rates for mortgage lending. The following schedules are illustrative of the lending rates as of August 2, 2013:
Average Rate of Interest on CPI-Indexed Mortgages
הריבית הממוצעת על משכנתאות צמודות למדד
מעל 25
מעל 20 ועד 25
מעל 15 ועד 20
מעל 10 ועד 15
מעל 5 ועד 10
עד 5 שנים
More than 25 years
From 20 to 25
From 15 to 20
From 10 to 15
From 5 to 10
Up to and
5 years
Bank of Israel 8-02-2013
US rates are higher:

US-West Average 30-Year Conventional Commitment Rate
Chart update 08/01/13
Month ago
Year ago
The average 30-year commitment rate is the rate at which a lender commits to lend mortgage money in the United States-West as reported by Freddie Mac. The western region includes CA, AZ, NV, OR, WA, UT, ID, MT, HI, AK, and GU. More information is available on Freddie Mac’s Primary Mortgage Market Survey report.
The ongoing social protest movement in Israel and the center-left political parties have raised their voices over the chronic inability of the average working Israeli family, the young, and senior citizens to afford decent housing. Israelis find it difficult to accumulate 40% of the sales price of a home in cash equity. The 60% loan-to-value ratio imposed by the underwriting guidelines and policies of the Bank of Israel effectively excludes or delays homeownership opportunities for first time homebuyers.
Not everyone is convinced the social protest movement has an answer to Israel’s housing shortage and the challenging first time homebuyer market. In “Dragging Israel Back to its Socialist Past” Jonathan S. Tobin, Commentary, July-August 2013, notes:

If it [Israel] is currently in the best economic shape of its short history, it is because its recent governments have understood there can be no going back to the “social democratic” nightmare that once created multi-year waits for phone installations and other vestiges of a largely state-run economy. As the Jerusalem Post notes in an incisive editorial, the protesters and those egging them on have no coherent program to offer as an alternative to the government’s policies. Instead, all they have are “empty populist slogans articulating nothing more than inchoate discontent.”If Israel is to continue on its current path toward greater prosperity, Netanyahu should stand his ground. While there can be no denying that problems exist and must be addressed, those who care about Israel’s future should not give encouragement to those who are trying to drag the Jewish state back to its troubled socialist past.

Notwithstanding Jonathan Tobin’s admonition that “recent governments have understood there can be no going back to the “social democratic” nightmare that once created multi-year waits for phone installations and other vestiges of a largely state-run economy,” the Israeli government response has been the opposite of Tobin’s desires and understanding of real estate markets and the elusive affordability index.
Nimrod Bousso writes in Ha’aretz, in an article entitled, “Government weighs new plan to set target prices for homes”:

The initiative… represents a sea change in the government’s attitude to the housing market. In the past, it has preferred free market solutions to housing and other industries over more government intervention.

“There’s no doubt that we’re talking about deep regulation on the part of the government, but we face a deep crisis,” said Chairman Bentzi Lieberman of the Israel Lands Authority.  He continued, “We have to develop an effective process for lower prices in a situation where the Bank of Israel, by continuing to lower interest rates, isn’t helping.”
Jonathan Tobin places his free market ideology above pragmatism and the “facts on the ground.” The problem in Israeli housing is that there is a “troubled present” and not so much a nightmare-ish socialist past.  The Netanyahu government is finally beginning to understand the dimensions of Israel’s current housing crisis and the need for proactive intervention. 
Israel needs to adopt new approaches and reform measures to create affordable/starter homes. Housing prices and rents are difficult for young couples to reach on their salaries. In Israel’s case, the government owns over 90% of all land, so it is certainly within its control to find many creative solutions to assist buyers and renters to make housing affordable.
Although Israel has a high homeownership rate by international standards, in the past 15 years, the homeownership rate in the country has been gradually declining as more households are renting due to the shortage of affordable housing. In 2008, the homeownership rate was 68.8%, down from 73% in 1995.
The many luxury high-rise residential towers planned for downtown Jerusalem and Tel Aviv also stand in stark contrast to the difficult state of housing affordability in the Region.
The following schedule from the Bank of Israel illustrates the problem of soaring sales prices across Israel’s three major cities and by region:
Jessica Steinberg notes in her JTA article of 08/2011, entitled, “Just how expensive is it to live in Israel?”:

According to figures from the real estate company RE/MAX Israel, apartment prices in central Tel Aviv run $5,714 to $7,142 per square meter. In Jerusalem, the peripheral neighborhoods of East Talpiot and Kiryat Hayovel offer housing from $4,285 to $5,714 per square meter, while prices in the tonier neighborhoods of Baka, the German Colony and Rechavia range from $7,000 to $8,571 per square meter.
That means that in Baka or the German Colony, a typical two-bedroom apartment starts at $428,571, according to Alyssa Friedland, a broker for RE/MAX. In the peripheral neighborhoods, some of which are built on territory captured from Jordan in the 1967 Six-Day War, a two-bedroom apartment runs for about $343,000. According to RE/MAX figures, two-bedroom apartments in Beersheva, Haifa, Hadera and Afula cost between $143,000 and $286,000.

Zionism’s founding father Theodore Herzl maintained a vision of a limited-equity model of home ownership for Israel.  This model has worked effectively in the US to create affordable housing. The most promising aspect of the limited equity model is that, when it works, it truly frees its participants from dependence on predatory bank lending and the regulatory actions of the state.
What makes “mutual cooperative housing” more democratic, affordable and egalitarian than other forms of multi-family housing?
Mutual cooperative apartment units require an initial, modest down payment; significantly, there is no direct mortgage loan or “end loan” to the homebuyer, thus eliminating the need for commercial banks, mortgage brokers, and so on. The homeowner assumes a “proportionate” or “pro-rata” share of the project’s total underlying mortgage obligation. Profit at resale is limited to fixtures installed by the owner. Apartment owners receive an income tax deduction for their proportionate share of real estate taxes and mortgage interest paid, thereby giving them the tax benefits of homeownership. At present, it is not possible for an Israeli citizen to deduct interest charges from their personal income tax. There has been talk about this becoming possible in the future. 
Risk of default by an apartment owner is minimized, again collectively, by spreading default risk equally to the other cooperative owners. The governance of the co-op is democratic by design, if not always in its execution. Democratic politics takes place within the co-op. A board of directors must be elected annually to administer the budget and maintain the project. Political parties, cliques, and factions develop and compete for seats on the board. It is not the architecture as much as the form of ownership and governance that is democratic. The limited equity mutual co-op is more egalitarian than any other form of multi-family housing.
There is a long tradition in support of “mutual cooperative housing,” pioneered by old-line social democratic trade unionists for their memberships. Numerous union-sponsored housing developments have proven to be an important solution to housing crises. This type of multi-family housing promotes democratic governance and social equality. It is “affordable housing.”
On a relatively large scale, in NYC, there is Penn South, Co-op City, and East Harlem’s 1199 Plaza. Penn South was sponsored by a local of the International Ladies’ Garment Workers’ Union headed by Charles Zimmerman. The Amalgamated Clothing Workers also built many thousands of units in the Bronx. There have been inspiring, long-lasting successes, and some near failures. The successful projects are examples of “democratic housing” in the metropolis. The near failures have succumbed to bureaucratic governance, mediocre building quality and uninspired Soviet-style architecture.
Israel has an opportunity to re-cast the limited-equity cooperative model of multifamily housing to its own needs. The limited-equity model is flexible, affordable and democratic. The limited-equity cooperative is structured to make the dream of a home or apartment of one’s own affordable to the working class, moderate income and low income Israelis. It is not the only solution, but it is a viable one for Israel’s cities and suburbs.
An Israeli Affordable Housing Corporation (“IAHC”) can be created and funded annually by the Knesset. The role of the IAHC would be to offer financial assistance to income-eligible first-time home buyers for new construction, acquisition/rehabilitation and home improvement. The IAHC would issue a ten-year self-extinguishing conditional grant at 0% interest to income-qualified first-time home buyers. The homebuyer must reside in their home for ten years, and the principal balance of the grant is reduced annually until it is extinguished in year 10.  If a sale occurs during the ten year residency period, another income-qualified family may assume the grant. If not, repayment of the balance due on the grant is made from proceeds of the sale. Typical grants average $35,000-$40,000 per unit in high cost areas.
Self-extinguishing grants have been issued by the US government since the enactment of the 1862 Homestead Act, during the Civil War. The Homestead Act required a five-year residency period.
Israel can create its own mortgage agency to assist first-time homebuyers, thereby circumventing the absurdly restrictive impositions and vagaries of the market. Mortgage loans can be financed through the sale of tax-exempt bonds. In the United States, tax-exempt mortgage bond programs generally feature competitive interest rates, low down payment requirements, flexible underwriting guidelines, no prepayment penalties and down payment assistance. Each of these features is designed to make a home purchase more affordable. The limited equity cooperative can be financed with tax-exempt bonds or more traditional bank financing.
Information Resources for “A Matter of Housing Equity”

Jewish Telegraphic Agency

Jerusalem Post
Commentary magazine,
Dragging Israel Back to Its Socialist Past” by Jonathan S. Tobin
Global Property Guide-Israel
Ha’aretz, August 11, 2013, “Government weighs new plan to set target prices for homes” by Nimrod Bousso
Bank of Israel
Bank of Israel, 08/03/2013, “Average Rate of Interest on CPI-Indexed Mortgages”
First Tuesday Journal, August 1, 2913, “Current Market Rates”
New Israel Fund“Israel’s Affordable Housing Protest Catches Fire,” Written by Ruby Ong
New Left Review 81, May-June 2013, Dr. Yonatan Mendel “New Jerusalem”
Ha’aretz, May 29, 2011, “Homes too expensive for 70% of Israelis,” Technion-Institute of Technology Study: by Shlomit Tzur and Arik Mirovsky
The Appraisal of Real Estate, 13th edition, Appraisal Institute.
Dissent magazine, “Democratic Housing” and Architecture,” by Lawrence Gulotta, January 23, 2012.
Lawrence Gulotta is a New York-based observer of Israel who is informed by a background in real estate economics and affordable housing finance. His most recent article for the blog of Dissent magazine is “Starchitects in the Promised Land.”
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