What is the Answer to the Tent City Protests?

It is somewhat ironic that Israel's housing crisis has run in a completely opposite direction to the crises that have taken place elsewhere around the world. House prices have dropped dramatically in the USA and Europe over the past few years. With this decrease in prices has come a wholesale collapse in the entire housing sector, as mortgage banks have found themselves unable to cope with clients not making their repayments, and the value of their collateral suddenly much lower than that of the loans. Governments have been forced to step in to save these institutions in order to prevent some of the biggest financial names going into liquidation. As opposed to this, house prices in Israel have continued to rise beyond the pockets of many ordinary citizens.

The phenomenon of oversupply and lack of demand seen in the rest of the world has not taken place in Israel, with prices somehow remaining fairly constant over the time that the bottom has dropped out of the market elsewhere. This means that Israelis, who have also suffered significant financial hardships over the period of the economic downturn, are not enjoying any relief from lower house prices. This fact extends itself into the rental market where rentals for ordinary apartments cost a great deal, and add to the financial woes of the average Israeli citizen. After experiencing price rises on a range of goods and services without commensurate increases in earnings, the Israeli consumer has eventually decided that he cannot tolerate the situation any further, and has spilled out onto the street in protest. The main target of the protest has been the inflated prices that citizens are required to pay for housing. Tent cities have sprung up in the central areas of many Israeli towns and cities, and protestors are sleeping on the street to demonstrate against the government for not paying sufficient attention to providing cheaper housing options.

In the 13 years since I moved to Israel, house prices have increased dramatically. Somehow the Israeli housing market has not seen the same ups and downs that have been evident in other markets. An apartment that cost approximately 800,000 Shekels back in 1998 will cost around 1.2 million Shekels today, an increase of 50%. Admittedly, there were years in which house prices did drop. Overall, however, the increase in the price of housing and of rentals has outstripped inflation by some distance. The reason for this comes from a number of different sources.

The most obvious issue driving house prices, is the fact that land in Israel is scarce. The entire area of the State of Israel is approximately 20,000 square kilometres, a similar size to the US state of New Jersey. Even the land that we have is not secure, with continuing demands by the Palestinians for Israel to relinquish further land claimed by them for a Palestinian state. With so little land available, it is inevitable that this will contribute to higher land prices. Attempts to build higher to use land more intensively have also not helped much to reduce the land cost element of the cost of property.

Along with the lack of supply, demand for property in Israel seems to be ever-increasing. Some of it is being fuelled by the upper classes who are not sensitive to the economic downturn, and who are constantly searching for bigger, better and more ostentatious properties. This is particularly true of the Israeli nouveau riche, some of them hi-tech and Internet millionaires. Demand is also being driven by Jews from outside of Israel who are looking for a piece of the Holy Land to use as a holiday pad. This demand has increased in recent years, and has contributed to parts of Jerusalem turning into ghost neighbourhoods with holiday apartments remaining empty between holiday visits. In addition, with approximately 20 years having passed since the gates of the former Soviet Union opened to allow Jews to leave for a new life in Israel, we are now seeing the effects of the children of these immigrants leaving the nest. A surprisingly high number of these new immigrants have succeeded in buying their own homes over the years, and now their children wish to emulate this example as they set out on their own paths. I recently attended an interesting seminar which showed that this generation will be driving demand for property and other major expense items for some time in the future.

All of this does not look optimistic for the man in the street. Israeli unemployment is currently at an all-time low of approximately 5.7%. For the economists amongst us, this means that Israel is nearing full employment, a situation where all those who wish to work are working. The problem is that this is not helping to reduce poverty. Salaries have remained so low despite increasing inflation, that Israel is increasingly becoming a nation of working poor (see my blog A Country of Working Poor). Most of those who are inhabiting the tent cities across Israel are not unemployed and homeless. The vast majority have jobs and homes, but are finding it impossible to keep making the rent or mortgage payments despite long working hours. For many people, the cost of keeping a roof over their heads is costing 50% and more from the money they bring home each month. Surely, this is an intolerable situation.

More than a hundred thousand people took to the streets last night in towns and cities from Rosh Pina to Eilat to protest the lack of action on the part of the government. The slogan being shouted at these protests is "an entire generation demands social justice". The feeling is that the government is pandering to the Israeli tycoons at the expense of the man in the street. This has enabled the tycoons to build and live in luxury developments which are under construction across Tel Aviv. Some of these sites have become targets for the protest0rs. The government has been unable to express what they have done so far to provide more affordable housing for young couples and lower income earners. The prime minister has been unwilling to come out to meet the protestors on the streets. This is contributing, not only to the feeling that the prime minister has done nothing, but also to the feeling that the government is unwilling to do anything to fix this situation.

Unfortunately, there are no simple answers to this serious and far-reaching problem. Many respected market watchers are predicting a significant drop in Israeli home prices in the near future. The problem is that it would take some time for rental prices to follow any correction, and I have my doubts that rental prices would fall in any significant way. I remain highly doubtful that a drop in house prices is on the horizon at all. Any action that the government may take now to provide lower cost housing is likely to take years until it comes to market. So what can the government do in response to this protest?

While the protest is focused on rising house prices, it is really about the general increases in the cost of living, while incomes remain static. The first step to fix this has already been taken by the government when they decided to freeze the fuel price increase that was set for tonight. The decision to hold fuel prices steady is likely to have a significant knock-on effect by holding the prices of many other items steady. The next step is to increase earnings to level the playing field. Starting with the doctors who are fully justified in their strikes for better pay over the past three months, public sector and private sector workers need a bigger pay cheque to allow them to balance the budget at the end of each month. In tandem with this, longer-term measures should be put in place to provide sufficient lower-cost housing for those who simply cannot afford to pay the prices in the current market. Failure to act quickly and decisively risks financial ruin for many families. The future of the government could easily rest upon its ability to react to this problem.