To Presentation (Hebrew)

Bank of Israel Governor Dr. Karnit Flug delivered remarks at the opening ceremony of the Alrov Institute for Real Estate Research at the Recanati Business School at Tel Aviv University.  The following are the main points of her remarks.

I am very happy to be here today at the opening of this institute.  Housing is one of the basic services a person requires.  In order to acquire housing services, a person first of all needs to decide whether to purchase or rent a home, and if he decides to purchase a home, the purchase is likely the most important economic transaction during his life.  The choice of a home contains within it a decision regarding the quality of housing services, including geographic location, and also contains as a central component considerations of investment in the asset.  Of course, these decisions, including the decision of whether to buy or rent, differ among different people, and depend on age, family status and size, income level, and geographic preferences and constraints.  The purchase of a home generally involves taking out a mortgage, which creates a long term commitment to meet the burden of repayments.  The process of creating supply to meet demand is also long and complex, and the government plays a central role in that process.
This all makes the real estate market very complex and, as such, requires an informed policy.  This is true of direct government policy, as the government owns most of the land and is responsible for the entire planning and licensing process, it is true of various aspects of regulatory policy, and it is true of taxation policy.  The Bank of Israel also plays a role in the real estate market, through its supervision of the banks—the main source of financing for the market—and through its macroeconomic roles and its role in maintaining systemic financial stability.
Of course, the basis for informed policy is an understanding of all aspects and components of the real estate market.  Therefore, it is very important that empirical and theoretical research in the field of housing and real estate delve deeper and expand more broadly, and I am certain that the research conducted here at the Alrov Institute will contribute to deeper knowledge and understanding of this market, and through it to more informed policy in the field.
In the end, policy decisions made in the real estate market will have a direct effect on housing prices—in addition to factors that are exogenous to the real estate market, such as the macroeconomic and geopolitical environments.
I would like to review the situation in the real estate market and the long-term trends in the market, the demand side, the supply side, and the effect of price increases on the various deciles in the population.  In conclusion, I will discuss policy measures that the Bank of Israel has taken and the required directions for policy on the supply side.
Housing prices are characterized by cyclicality over time.  In terms of trends over a long period, price increases in Israel are lower than what has been observed in many other countries.  The price increases in Israel in recent years should be analyzed in terms of supply and demand.  There are a number of factors affecting the demand side, including demographic changes, higher standard of living, and interest rates relative to alternative yields in the capital markets. 
The current cycle of price increases began in 2007, before the process of interest rate reductions, following about a decade of real decline.  When the crisis began, and the need to lower interest rates both in Israel and abroad to very low rates became apparent, demand for real estate as an investment asset increased, as did the ability to finance mortgages.  It should be noted that while prices increases are undoubtedly a burden on home buyers, lowering the interest rate, as stated, eased the burden of mortgage payments.  In parallel, the increase in net household income and extending the repayment period also made the purchase of a home more affordable.  In view of the increase in demand, an adjustment was called for on the supply side, but this has taken a long time.  The process, from initiation to the completion of construction, is very long.  We are currently seeing a relatively high level of building starts and building completions that are in line with the natural growth rate of the population, but it is important to maintain at least this level over time, with an emphasis on high-demand areas.
­The Banking Supervision Department will soon publish an analysis of unique data it has gathered for the purpose of evaluating the effects of developments in the mortgage market on stability.  Among other things, the distribution of loans in recent years by income deciles has been analyzed.  A first glans at this analysis shows that loan distribution among the top six deciles is quite uniform, but the lower four deciles have a lower share of loans.  The prices of homes purchased through a mortgage increase as the income decile increases, and the number of monthly family incomes necessary for a household to purchase a home declines as the income decile increases.  As such, the problem of affordability as shown by the mortgage market is serious mainly among the low income deciles.
In recent years, the Bank of Israel has taken a number of measures to reduce macroprudential risk only on the increase in the volume of housing credit.  The main policy directions required are an increase on the supply side, which is the required basis for the stabilization and even lowering of prices:
v  Increasing the volume of land available for construction in high-demand areas, and creating an available planning stock for the coming years.
v  Measures to shorten the duration from planning the construction to the actual start of building.
v  Synchronization between building plans and infrastructure development (transportation, sewage, and so forth).
v  Increasing urban population density and encouragement of urban renewal (vacate-and-build).
v  Reducing the negative incentive, and providing a positive incentive, to the local authorities to increase supply.
Specific policy measures are currently the subject of internal discussions in the various government ministries, and the Bank of Israel is participating in them.