Address by Dr. Kobi Braude of the Research Department: Demographics and Housing Affordability in Israel
An address at the “Conference on Housing Affordability” of Tel Aviv University’s Alrov Institute, the Bank of Israel, UCLA, Board of Governors of the US Federal Reserve, and the American Enterprise Institute
· The adverse impact on housing affordability in terms of household net income was much smaller than in terms of gross wage per employee post.
· An estimation of the demographic need for homes in the Jewish sector indicates that until approximately 2009, the number of starts was markedly lower than the need. Since then, the rate of building starts has increased and as of today it is near the current need. Building completions, by their nature, react more slowly.
· The assessment is that the accumulated shortage in homes relative to demographic needs in the Jewish sector is 30,000–40,000 homes. With that, demand is also affected by other factors.
· The population growth rate and demographic processes require maintaining the high level of building starts of the past three years, and even slightly higher in order to close the accumulated gap.
· In order to ensure a high level of building starts over time, there will be a need to increase density of construction in cities and to build appropriate infrastructures, such as mass transportation systems.
Dr. Kobi Braude, Advisor to the Director of the Research Department at the Bank of Israel, today presented several findings on the issue of demographics and housing affordability in Israel. His presentation is attached.
Dr. Braude showed that though since 2008 home prices have increased by a much faster rate than rent (Slide 2), the question of how to examine the development of housing affordability remains. The negative impact on affordability, in terms of the ability to purchase a home, was much greater than in terms of ability to make rent payments. The adverse impact in terms of household net income was much smaller than in terms of gross wage per employee post. The overall result, at the two extremes, is that when measuring affordability in terms of number of annual gross salaries (per employee post) required to purchase a home, it is found that it has been negatively impacted to a marked extent, but that in terms of rent as a share of household net income, affordability has been slightly negatively impacted since 2008 and is virtually unchanged from 2004 (Slide 3).
Braude defined the term “demographic need” as annual growth in the number of homes required to supply the increase in housing needs deriving from an increase in the population, taking into account its composition and housing characteristics. This is not the same as demand for homes, which is impacted by additional factors such as return on financial assets and home prices. He presented a calculation of housing needs in the Jewish sector. To do so, various assumptions were made regarding coefficients for housing density (number of adults per home) for various population segments, by age and family status (Slide 7), and the overall need was estimated using two different models. Based on the results, on average, the demographic need in the Jewish sector in recent years is for an addition of 41,000 homes per year.
A comparison of this need with an estimate of the number of building starts in the Jewish sector—building starts in Jewish localities as defined by the Central Bureau of Statistics, making up about 87 percent of total building starts—indicates that until approximately 2009, the number of starts was markedly lower than the need. Since then, the rate of building starts has greatly accelerated and today it is near the current need (Slide 8). Building completions, by their nature, react with some lag vis-à-vis building starts (Slide 9).
Regarding the gap that accumulated between need and actual building starts, Braude estimated that the continued decline in home prices through 2007 indicates that until then there was surplus supply of homes (Slide 10), and the stabilizing of prices around that year indicates the exhaustion of the surplus at that time. Therefore, only the gaps since 2008 need to be closed. This leads to the assessment that the accumulated shortage in homes relative to demographic needs in the Jewish sector is around 30,000–40,000 homes. Clearly this shortage is not the only factor impacting on demand for homes and on their prices today, since, as noted, the demand is impacted on by, among other things, the yield on alternative assets.
Braude noted that the population growth rate and demographic processes require maintaining the high level of building starts of the past three years, and even slightly higher in order to close the accumulated gap. In order to ensure a high level over time, there will be a need to increase density of construction in cities and to build appropriate infrastructures, such as mass transportation systems. In addition, he noted that a change in social characteristics, reflected in an increase in the share of unmarried people in the population as well as the aging of the population, indicate the need to align the mix of homes built, in terms of size, and not simply to focus on the number of homes required.
Regarding the Arab public, Dr. Braude clarified that the housing markets in the Arab and Jewish sectors are separate and different in many ways. Other than the need to estimate separately the coefficients related to calculating the needs in the Arab sector, calculating the gap between the need and the number of building starts in that sector is more complex, in view of the information gap in official data regarding the scope of building starts there. Therefore, the calculation in the first stage dealt only with the housing market in the Jewish sector.