Research: Housing affordability - The ratio of home prices and rents to income across districts in Israel, 2004–12
An excerpt from the upcoming "Recent Economic Developments (137)" that will soon be published: Housing affordability: The ratio of home prices and rents to income across districts in Israel, 2004–12.
- The ability to rent a home, relative to household income, was not lower in 2012 than in 2004. Although rent increased from 2008 and reduced rental affordability, this reduction counterbalanced the improvement that had previously occurred.
- The ability to purchase a home declined markedly between 2004 and 2012, primarily in the Jerusalem and Tel Aviv districts, increasing only in Haifa.
- The most expensive home prices and rents are in the Tel Aviv district. However, the lowest affordability of buying or renting a home is in the Jerusalem district, which has the highest prices relative to household income. In contrast, in the Haifa district, affordability is highest even though it is not the district with the lowest home prices, because household incomes there are high relative to home prices.
An analysis of the ratio of rent to household income indicates that the ability to rent a home (rental affordability) was not lower in 2012 than in 2004, and that the deterioration in affordability found from 2008 to 2012 counterbalanced the improvement that had occurred until 2008. Home-purchase affordability, in contrast, did in fact decline during this period: between 2004 and 2012 home prices increased, in terms of number of years of income required to purchase a home. In the various districts an additional 1–3 years of average household income are needed to purchase a home. The Haifa district is an exception, as home-purchase affordability there improved.
The smaller the share of rental expenditure in income, the greater rental affordability is. In an analysis conducted at the Bank of Israel, income of all individuals in a household—labor and non-labor income (including pension payments, support and transfer payments, and financial income)—was used. This analysis is preferable to an analysis which compares rental cost to salary per employee post.
Although salary per employee post is published at a monthly frequency, it has several disadvantages—it reflects gross, not net, wages; it reflects income from labor alone; and it does not reflect overall household income, even though housing is consumed by a household.
Figure 1 shows the importance of using the appropriate definition. In terms of expenditure on rent relative to gross wage per employee post, the figure shows that affordability deteriorated between 2004 and 2012, as the ratio increased from 0.32 to 0.37—that is, in 2004 home rental expenditures accounted for 32 percent of wages, and in 2012 they accounted for 37 percent of wages. In contrast, using gross household income presents a much better picture: the ratio increased slightly, from 0.19 in 2004 to 0.2 in 2012. This picture becomes sharper when examining the trend based on the most relevant indicator—net household income: the ratio in 2012 (0.24) is not different than the ratio in 2004. The figure indicates that rental affordability did in fact decrease since 2009, but this decline offset the improvement which had occurred previously. The data also indicate that the stability in affordability did not derive from increased density, since household density (the number of people per home) did not change over the course of the period.
The stability of rental affordability means that rents increased in parallel with household incomes, and therefore the share of expenditure on rent in income was not different in 2012 than in 2004. Examining growth in incomes indicates that it derived from the general increase of wages in the economy, the decline in taxation on labor income, and the increase in the participation rate and number of hours worked among households. However, these measures increased primarily between 2004 and 2008, while rents were essentially unchanged during that period, so that during that time there was an improvement in affordability. In contrast, from 2009, rents increased considerably while income variables increased slowly. Thus, affordability deteriorated during that period, and offset the improvement that had occurred previously.
The analysis also examined the level of rental affordability, and the changes in it, in six districts in Israel, through various rent and income measures (Figure 2 presents one of them). All the measures indicate that rental affordability did not deteriorate in every district by 2012 compared with 2004. In contrast, the ratio of home prices to incomes increased in all the districts, and in order to buy a home in 2012 an additional 3 years of income are required in the Jerusalem and Tel Aviv districts, compared with 2004, and about another year’s income in other districts (Figure 3). Haifa is an exception, as there was a decline in the cost of purchasing a home and in the cost of rent relative to income, and the ratio there is lowest. This is despite the fact that Haifa is not the district with the lowest home prices; it is because the incomes of households living there are relatively high, compared with home prices and rents. In contrast, Jerusalem has the highest ratio of rental and home purchase costs to income, even though it is not the most expensive district. Figure 2 indicates that the ratio of rent to income in the Center district is similar to the North and South districts, but the ratio of home price to income in the Center is higher than in those districts.