Homes prices in Israel are unquestionably among the highest worldwide in terms of price per sq. meter/foot. What is alarming is that there is no correlation between the prices of homes/apartments and average income.
The average 4.5‐5 room (3‐4 bedroom) apartment (say 120‐150 sq. meters/1,200‐ 1,500 sq. feet) in Tel Aviv costs about $850,000. Nowadays, banks are lending 65% of the total purchase price, provided that your monthly mortgage payment is no more than one third of your gross monthly income. According to recent statistics, the average Israeli earns $31,296 annually, or $2,608 per month. This leaves only $870 per month as the maximum amount qualifying for a bank loan. If you assume a 65% mortgage ($553,000), with an interest rate of, say, 6% per annum, the monthly payment is $2,765. But let's assume both parents work, so that this couple can afford a maximum monthly mortgage payment of $1,740. This is still only 63% of the monthly mortgage payment on the average home.
In the US, the math works just fine today; income is correlated with the mortgage and price of a home. Of course, when lending institutions were overzealous, loans were made far in excess of what people could afford, and in many cases buyers didn't even have to make a down payment. Nor were they required to prove their earnings. Those homeowners lost their homes through foreclosure and are now renters. Now, US lenders have revamped their lending practices. Borrowers must demonstrate that they have the income to support the monthly mortgage. US lenders have gone overboard, and the conditions for obtaining financing for a home are so stringent that many cannot qualify, which is stifling the home sale market.
The Israeli government is now thinking of amending housing policy on affordable housing. This is a step in the right direction. The US has been very progressive in providing affordable housing for many years. In California, most cities require developers to set aside 10%‐25% of a project for affordable housing, as defined by strict financial guidelines. Developers are granted higher density to offset this cost. HUD (Housing Urban Development) programs have been operating for years in this space providing affordable housing programs to those who qualify, both in rented accommodation and for‐sale housing. Then there is also the Veterans Association (VA) to cover war vets. This list goes on. In certain cities in the US, such as San Francisco and New York, cities have opted for having a rent control policy. This in effect controls the market rate rent when a unit goes to market and restricts annual rent increases for existing tenants on the basis of a specific formula. Both cities implemented a rent control policy to keep rent affordable and within the means of a renter.
In California, architects have been very inventive in creating efficiently designed homes that would be considered starter homes. In one project located in Sunnyvale, California, the developers, Copley Square LP, whose general partners were Ron Diller and Kyung Yoon, were able to get city approval to amend the zoning from 15/DUA to 35/DUA, classified as high density, by providing an interesting housing project aimed at first time home buyers. The project consisted of 45 attached townhomes, what we call in Israel duplexes. There were two floor plans: a one and two‐bedroom plan. The one‐bedroom was 651 sq. feet (65 sq. meters), and the two‐bedroom was 1,023 sq. feet (102 sq. meters). The base footprint was 20' x 20' on a lot size of 600 sq. feet (60 sq. meters). Each home came with its own private car park. This project was conceived in December 1991. At that time, the homes were priced from $149,000‐$189,000, which made the monthly mortgage payment equivalent to the rent. This housing project was in‐fill located on a major highway situated in back of a carwash. In Israel, townhome plots are not less than 3,000 sq. feet (300 sq. meters), which is far from maximizing the optimal usage of land. Tel Aviv's answer to affordable housing is to construct a 32‐story tower and to sell a 4‐room 100 sq. meter apartment for close to $1 million!
One other profound architect from San Francisco who has won numerous awards for his unique designs for starter homes is Donald MacDonald. In 1988, he came up with a starter townhome cottage consisting of 298 sq. feet (30 sq. meters) in San Francisco that cost only $12,000 to build (excluding land). The home had a base foot print of 17' wide x 14' deep. Since 1984, MacDonald had been developing these in‐fill projects, which sold for $115,000‐$120,000 and rented for ‐$650‐$800/month ‐ far below the median home price. The rent at that time equaled the mortgage payment, assuming a 75% mortgage. Other architects/developers have built numerous housing projects achieving similar results to MacDonald's. Below is the loft and first floor living area of MacDonald's cottage model.
Here is a project developed by an innovative architect/developer from San Francisco named David Sternberg, consisting of 6 townhomes in an industrial area south of Market street in San Francisco.
Another well-known architect is David Baker, a leader in providing affordable housing design and using in‐fill land sites to provide high‐density affordable housing projects. Below are exterior and interior views of an attached townhome project located in an old industrial area of San Francisco not far from Sternberg's project.
Israel needs to adopt these novel approaches to create affordable/starter homes. Housing prices and rent are becoming further and further out of reach for young couples. In Israel's case, the government owns over 90% of all land, so it is certainly within its control to find many creative solutions to assist buyers and renters to make housing affordable. There is no economic justification for the outlandish prices of homes in Israel. Certainly in places like San Francisco and New York, homes prices are terribly Expensive, but earnings and income are far higher so that there is a distinct correlation between the home price and income. In Israel, this is not the case. Home prices are on a par with New York and San Francisco, but wages are less than half, so the equation makes no sense. What makes Israelis special is their sense of commitment to family and their children and willingness to assist young couples with the purchase of their first apartment by providing, if not all the money in cash, certainly a hefty down payment that will allow the couple to qualify for a bank loan. What would happen if families didn't do this? What would happen to home prices? They would presumably revert back to a level that keeps the ratios in line as they are in the US.
Published by Globes [online], Israel business news - www.globes-online.com - on May 13, 2013
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