No. 4 ~ May 1996
ISRAEL'S HOUSING SUBSIDY PROGRAMS
I. Introduction
The Israeli government seeks to assist new immigrants and young couples who have served in the Israel Defense Forces by providing rent and mortgage subsidies. The justification for this assistance is the high cost of housing in Israel. There is a wide social consensus that it is unfair to expect newly married and recently discharged veterans, forced to enter the housing market when their savings and earnings are low, to pay the high rental rates and high housing prices in the Israeli market. There is an equally strong consensus that Israel benefits, both economically and ideologically, from immigration, and that high housing costs are a major obstacle to immigration. The policy of providing rent and mortgage subsidies to new immigrants and young couples is formally supported by all of the major political parties in Israel.
Israeli rental and mortgage subsidies are distributed via the mortgage banks. The mortgage subsidy has two components: (i) loans offered at below-market interest rates, and (ii) an outright grant that must be repaid if the house or apartment is sold within a specified time period. Rental subsidies are awarded for up to five years. These subsidies are in the form of a grant covering a six month period.
The sums required to finance these programs are considerable. In 1995, the Ministry of Housing and Construction spent $800 million on mortgage grants, $1 billion on mortgage subsidies (covering the difference between the terms offered by these subsidized mortgages and market rates), $330 million in rental subsidies, and $80 million in fees paid to the mortgage banks for administering these programs. 1 Total expenditures on these programs will amount to 3 percent of Israel's gross domestic product (GDP) in 1995. To fully grasp the magnitude of this sum, expenditure of a similar per capita sum in the United States would result in a program costing $100 billion. Expenditure of a similar percentage of GDP in the United States would result in an even larger program costing $200 billion. Total expenditures on these programs in Israel are projected to rise to $2.8 billion in 1996.
The budget outlays discussed above grossly underestimate the actual economic burden of these programs on the Israeli economy. These expenditures can only be financed by taxation, borrowing, or the printing of money. High taxation lowers economic growth and exacerbates unemployment problems. Borrowing "crowds out" private sector borrowers, resulting in higher real interest rates and slower growth. Printing money simply fuels inflation. These side effects of government expenditure--lower growth, higher inflation, and higher unemployment--are not inconsequential. Razin and Sadka conservatively estimate that the economic costs of government spending in Israel is 126 percent of the actual sum spent. 2 As a result, nearly 4 percent of Israel's potential GDP is devoted to housing subsidies, a truly immense proportion of its limited economic resources.
Given these large sums, it is reasonable to ask if Israeli taxpayers are "getting value for their money." Just how efficient are these programs in benefiting their target populations--new immigrants and veterans? This paper's answer is that immigrants and young veterans derive no benefits from housing subsidy programs, while they are required to share in the cost of financing these programs. Immigrants and young couples would be better off if all housing subsidy programs were canceled immediately. A central element of any housing market reform should be the rapid phase-out of all subsidy programs. High housing costs in Israel are the result of supply constraints, and the shortage can only be alleviated by "supply side" measures. In particular, rapid expansion of the quantity of Israeli real estate subject to market forces, as well as improvements in transportation infrastructure, would be far more effective in relieving housing shortages and bringing about lower housing prices and rents.
This paper is divided into six sections. Section II presents an overview of the land market in Israel. Section III introduces and explains a simplified version of the analytical methods exploited by economists to evaluate the effects of demand subsidies. Section IV evaluates the impact of the subsidization of housing on different social groups. Section V considers a number of options for housing policy reform. Section VI concludes with a review of the study’s major findings and recommendations.
 | Part II |