A recent study conducted by researchers at the Aaron Institute for Economic Policy reveals that housing prices in Israel are projected to increase by approximately 6% by the end of 2025. The study indicates that a significant portion—40%—of the high cost of living in Israel is attributable to the housing market. Key factors contributing to this situation include the ongoing impacts of the Iron Sword War, which has exacerbated the housing supply crisis along with increasing traffic congestion.
Key Findings:
High Cost of Living: The high prices of housing play a crucial role in the overall cost of living. The research shows that the average household in Israel allocates a substantial portion of its budget to housing, leading to decreased living standards and increasing inequality. Compared to other countries, Israel has a notably high cost of living: it's 38% higher than in OECD countries, 10% compared to the U.S., and 85% higher than in Cyprus for the same consumption basket.
Historical Price Increases: Since 2012, real estate prices have risen by an average of 4.8% per year, with housing prices now approximately 28% above the long-term trend in GDP per capita growth, which stands at 2%. This spike in housing prices is largely due to the growth in households outpacing the construction of new housing units by 132,000 from 2012 to 2023.
Traffic Conditions: Another aspect of high living costs, which isn't always directly included in household expenditure, is the extended commute times. Travel times in Israel are reported to be double those in leading global metropolitan areas, further increasing housing costs, particularly in urban centers. Researchers estimate that traffic congestion adds about 6% to the cost of living.
Iron Sword: With the costs of the war constricting public budgets for social and development, investment in infrastructure will be reduced in the oncoming years, further increasing congestion. The urban projects to increase housing supply through urban renewal will overtake in pace the adjacent plans for mass means of transport along these routes, which will, albeit temporarily, further increase traffic obstructions.
Immigration: Although yet proven, expected immigration due to increased anti-semitism in Europe and the USA, may further increase demand in designated areas.
Implications for Policy:
Without significant infrastructure improvements, such as the development of a metro system, researchers warn that commuting times could double, exacerbating living costs. The current lack of transportation planning and underdeveloped public transport options contribute to challenges in affordability and accessibility.
Recommendations for Economic Policy:
Increase Housing Supply: To alleviate high prices, the researchers recommend increasing building permits to 100,000 annually, exceeding the expected growth in households. This would involve ramping up the completion of housing units from 63,000 in 2026 to around 100,000 over the next decade.
Urban Renewal Initiatives: The study suggests enhancing the urban renewal process by integrating clear building rights and development zones, particularly in 50 key cities.
Reduced Regulatory Barriers: Streamlining the process for obtaining building permits and incentivizing local authorities through changes in property tax structures could stimulate construction.
Transportation Accessibility Goals: Establishing goals to reduce public transport travel times by 50% and increasing public transport usage by 20-50% is crucial. This could involve integrated planning between housing and transportation, focusing on developing metro systems, light rail, and efficient bus networks.
Investment in Infrastructure: The study proposes an investment of around 940 billion shekels to improve urban infrastructure, including water, sewage, education, and health services, aligning with housing development goals.
By implementing these policies, researchers believe Israel can significantly reduce housing price disparities between urban centers and peripheral regions, ultimately leading to increased economic stability and improved living standards for its residents.
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