| The Deputy Governor of the Bank of Israel, Professor Zvi Eckstein, spoke today at the Annual Conference of the Israeli Geographical Association which was held at the Hebrew University of Jerusalem. In his opening words, he spoke about the cyclicity that exists in housing prices in Israel and worldwide, which are characterized by a long-term upward trend. This trend constitutes a financial risk when the business cycle starts to turn “bearish”. Real estate bubbles around the world were characterized by a significant decoupling between housing prices and rents. Professor Eckstein pointed out that at the moment, there is apparently no bubble in housing prices in Israel, despite a beginning of a worrying trend of an increase in housing prices at a faster pace than that of the increase in rent. He added that the Bank of Israel is taking steps to prevent such a situation in the Israeli economy. |
| The Deputy Governor listed a number of reasons for the rise in prices. First and foremost is the limited supply of land for residential construction. He continued by stating that while the Israel Land Administration is the almost exclusive owner of land in the country (about 80 percent), it is involved in only 40 percent of residential building initiatives. Such dominance by the government in land ownership is peculiar to Israel and the Israel Land Administration’s lack of incentives for business development is among the factors behind the upward pressure on prices during recent months, alongside the low interest rate in the economy and the increase in credit for mortgages. |
| According to the Deputy Governor, one of the main steps required in order to reduce housing and land prices in Israel is the large-scale sale of state lands that are designated for building, which would increase competition in the industry and the scope of private business initiative. The Deputy Governor emphasized the need for a reform of licensing and planning, which would involve strengthening the local committees and the supervision over them. This will facilitate competition among the municipalities for building initiatives. The Deputy Governor summed up by saying that the creation of new cities is not recommended at this point since it would be a “zero sum game in which budget resources would be shifted away from existing cities.” In addition, he stated that in the short run tax breaks should be introduced to encourage a more rapid pace of construction through the mechanization of the construction industry as a whole. |
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