A typical home in Tel Aviv will require the buyer to bring 65% of the funds from his own sources with the balance from bank financing. This is because average salaries in Israel can only support a bank loan of 35% of the purchase price. This is totally absurd. Who on earth in Israel can save up this huge sum of money when salaries for comparable jobs are less than half of those in the US? There, the typical down payment for homes is 5%-25% of the purchase a home -a range in striking distance.
One of the solutions applied in the US for providing affordable housing is for local governments to require on all approved housing projects to set aside a minimum 10%-15% of the housing units for affordable housing. In order to offset this cost, cities generally allow the developers to have higher density than is allowed under the zoning ordinance. In cities like Sunnyvale, in the San Francisco Bay Area, under a longstanding program, 10% of all multifamily units are designated as “Below Market Rate” (BMR), and are in fact transferred to the housing authority of Sunnyvale, which sells the homes to families of median income and who meet a stringent set of financial requirements.
The US government has many affordable housing programs. I will discuss only a few and show how they can be applied in Israel.
HUD (Housing Urban Development), a department of the federal government, offers many programs for families on low to moderate incomes. The most prominent program, called Section 8, is managed by the US Department of Housing and Urban Development. This program provides financial relief to low income families through issuance of vouchers, commonly known as “the Housing Choice Voucher” program, which pays a up to 95% of the rent for about 2.1 million US households. This is predicated on renters having family income levels ranging from 50% to 80% of the lower income limits of the median income for the county or metropolitan area where the home is located.
Section 8 also authorizes a variety of "project-based" rental assistance programs, under which the owner reserves some or all of the units in a building for low-income tenants, in return for a federal government guarantee to make up the difference between the tenant's contribution and the rent in the owner's contract with the government. A tenant who leaves a subsidized project will lose access to the project-based subsidy.
HUD and the US Department of Veterans Affairs (VA) have also created a program called Veterans Affairs Supportive Housing (VASH), or HUD-VASH, which distributes roughly 10,000 vouchers per year at a cost of roughly $75 million to eligible homeless and otherwise vulnerable US armed forces veterans. This program was created to pair HUD-funded vouchers with VA-funded services such as healthcare, counseling, and case management.
The Federal Housing Authority (FHA) has been around since 1934 and is a part of HUD. FHA will finance up to 96.5% of the purchase price of a home, representing a 3.5% down payment. Interest on FHA Loans is currently running around 3.62-3.750% for a 30-year fixed rate mortgage. Mortgage insurance can add another .50-.70 basis points, so that the total interest rate is 4.125-4.45%.
These are only a few of the US federal government programs available to assist homebuyers or renters, making housing affordable. In Israel, the Israel Lands Authority owns and manages approximately 97% of all lands, comprising some 19.5 million square. meters of land. This makes the process much easier, as land in Israel represents around 50% of the total cost of constructing an apartment building. The US does not have this luxury and its programs are funded entirely by taxpayer dollars.
With this immense asset base, the government could leverage the land and float a 30-year long-term bond, the proceeds of which would be used to provide financing of up to 97% of the purchase price for low to median income family households. This will avoid having to increase taxes. If the Israeli government removed the cost of the land, this would reduce the price of the apartment by 50%. The government could designate a certain percentage of land in each city for affordable housing and for specific programs.
Of course, in order for this to be effective, it is essential that all housing should be close to public transportation and jobs. If the average apartment in Tel Aviv costs NIS 2.8 million, then if we deduct the cost of land, the cost of the apartment is NIS 1.4 million to the new buyer. If current average household income in Israel is NIS 19,653 monthly, NIS 6,650 can be appropriated for the mortgage. In this example, if the State of Israel funds 97% of the purchase price as a 30-year loan secured as a first deed of trust against the property, which in this case would equal NIS 1.358 million earning a fixed rate of interest of 3% per annum, then the monthly principal and interest payment is NIS 5,600, well within the financial limitations. The actual down payment required in order to purchase a new apartment under this new proposed scheme would be only NIS 40,700 ($10,175), a far cry from the 65% currently required, which amounts to NIS 883,000 in this example. Of course such programs would also fuel the economy, so that this becomes a win-win situation for everyone.
Published by Globes [online], Israel business news - www.globes-online.com - on April 7, 2015
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