Section II showed that the supply of real estate in Israel closely approximates the characteristics of a fixed factor in that it is insensitive to price. As we have seen from the simplified theoretical analysis presented in Section III, subsidization of a fixed factor only benefits the owners or suppliers of the factor. It would be inaccurate, however, to conclude that all those who own or control real estate benefit from Israel's housing subsidy regime, while those who consume housing services enjoy no benefits. The assumption that suppliers and consumers are two distinct groups is overly simplistic. In the real world, suppliers and consumers of housing services are often the same people. Furthermore, there are many different types of consumers and suppliers. This section identifies the effects of housing subsidies on six distinct social groups. These groups are distinguished by four characteristics: (i) to what extent members of the group supply housing services; (ii) to what extent member of the group consume housing services; (iii) whether members of this group are entitled to subsidies; and (iv) whether members of this group pay taxes to finance the subsidies. The six groups are: (A) new immigrants and young couples entitled to subsidies; (B) renters and first time home purchasers who are not entitled to subsidies; (C) people who own their own homes; (D) local real estate investors (either real estate firms or individuals who own additional homes or apartments for investment purposes); (E) foreign real estate investors; and (F) people who intend to emigrate from Israel.

A. New Immigrants And Young Couples Entitled To Subsidies

Section III demonstrates that all the benefits of a demand subsidy accrue to suppliers. It was assumed, however, that all consumers receive the subsidy. If only a sub-group receives the subsidy, the result no longer holds. In this case, suppliers will still enjoy gains equal to the value of the subsidy, but subsidized consumers will enjoy some benefit (prices will not rise by as much as the value of the subsidy they receive), while unsubsidized consumers will be hurt, since prices rise but they receive no subsidy.

If subsidized consumers represented only a small proportion of consumers, it could then be concluded that important benefits were accruing to this sub-group. In the case of Israel, however, this is not so. The vast majority of housing consumers are either new immigrants and young couples (who are formally entitled to subsidies) or people who themselves own apartments and villas. While the latter group is not formally entitled to subsidies, it nevertheless is subsidized. Members of this group are both consumers and suppliers. In effect, members of this group don't mind paying higher prices for housing since they also receive higher prices for the housing they supply.

To understand this point, consider a family living in a $100,000 home. Introduction of subsidies raises the home's market price to $150,000. The family has obviously gained in wealth. This wealth, however, is of no value to the family. In order to realize the gain in wealth, the home must be sold. A new home must be purchased in its stead, and the new home's price is also 50 percent higher than it otherwise would have been. In effect, "one hand giveth whilst the other taketh away."

Since almost all consumers of housing services are in some way subsidized, either directly or indirectly, the result from Section III holds. The consumers do not benefit. Hence, we can conclude that new immigrants and young couples do not receive any direct benefit from the subsidy. Unfortunately, new immigrants and young couples will be expected to pay their share of the taxes required to finance these subsidies. This is one of the key conclusions of this paper. Israel's housing subsidy programs, intended to aid new immigrants and young couples who served in the Israel Defense Forces, is actually a burden that makes life more difficult for members of these groups.

B. Renters And First Time Home Buyers Not Entitled To Subsidies

There are a relatively small number of Israelis who rent housing services yet fail to receive any subsidies. The many people in Israel who live in rental housing while they also rent out property that they own should not be included in this group. As mentioned above, these people are, in fact, subsidized, since they act as both renter and landlord. Another group that should not be included are renters who live in government-owned housing, which is provided to them at extremely low rental rates. Most of the few remaining renters are those who never succeeded in accumulating sufficient resources to purchase a home. Although not particularly large, this group is of considerable social importance, since many of Israel's poorest people belong to it.

Members of this group are unambiguously hurt by housing subsidies. They pay higher rents, which makes it difficult to save money. When they finally do enter the housing market to purchase an apartment, they face higher prices. They do not qualify for the subsidies that would offset these higher prices, and they are not indirectly subsidized as are home owners. Furthermore, to the extent that these people pay taxes, they are forced to assist in the financing of these programs. This is another of this paper's key conclusions. The housing subsidy programs are a burden on many of Israel's poorest people, and make it more difficult for them to accumulate savings and purchase a home.

C. Homeowners

As mentioned above, homeowners are both suppliers and consumers of housing. Since they do not directly qualify for subsidies, they are, as consumers, hurt by the higher prevailing real estate values caused by the subsidy programs. As suppliers, however, they directly benefit from the higher values their real estate assets enjoy. Once again, it doesn't matter if the homeowner lives in his own home or rents his home to someone else while living elsewhere. If the homeowner rents his property while renting another property from someone else, the higher rent he must pay is canceled out by the higher rent he receives from others. If the homeowner lives in his own home, the benefit he receives in terms of higher real estate value remains unused. He must sell the property in order to realize the benefit of higher housing prices. Of course, he must then purchase another home, whose price is also artificially high. Once again, the overall effect is neutral. To the extent, however, that this group participates in financing the subsidy programs, it is harmed. Since members of this group pay the lion's share of Israeli taxes, the housing subsidies clearly, overall, constitute a burden on them.

D. Israeli Real Estate Investors

Another group affected by housing subsidies are Israelis who, in addition to the real estate they own for their own housing needs, invest in real estate as a business. This group includes wealthy Israelis who own additional apartments purchased as investments and used for rental purposes. It also includes Israeli firms with major real estate holdings. These firms may, but need not, hold actual land titles. Firms like citrus producer Mehadrin do not actually own land, but control land leased to them by the ILA. As mentioned in Section II, Israeli practice is for revenue from the transfer of lease rights on ILA owned, but privately leased, land to be split between the public owners and private lease holders. Another important portion of this group are kibbutzim and moshavim. Much like Mehadrin, these collective and cooperative communities lease large tracts of land from the ILA, and are allowed to keep a proportion of any revenue generated by lease transfer.

While members of this group are, to some extent, consumers of housing services, their importance as land suppliers is clearly more significant. Members of these groups also have to pay their share of taxes required to finance housing subsidies, but overall, it is difficult to believe that the negative consequences of housing programs outweigh the benefits for this group. Israeli real estate investors--primarily kibbutzim, moshavim, real estate investment firms, and wealthy individuals who purchase additional apartments as speculative investments--are, overall, beneficiaries of housing subsidy programs.

E. Foreign Real Estate Investors

It is difficult to ascertain to what extent foreign investors are involved in the Israeli real estate market. Anecdotal evidence suggests that such investment is limited primarily to wealthy individuals who purchase apartments in Israel as investments. The Jerusalem Post, an English language Israeli newspaper widely read in the United States and Europe, is full of advertisements aimed at foreigners interested in purchasing Israeli real estate. I myself live in an apartment owned by an Italian couple. Foreigners are obviously active in the Israeli market.

As suppliers of housing, foreign investors enjoy higher real estate values and rents. Unlike local investors, they do not consume housing services in Israel, and hence they are not hurt by the negative effects these subsidies have on consumers. In addition, Israeli taxes on this group are minimal, so members of this group need not participate in the financing of the subsidies. Foreign real estate investors unambiguously benefit from the housing subsidy programs.

F. Emigrants

Israelis who emigrate enjoy all the subsidy benefits that accrue to real estate suppliers--they can sell or rent their Israeli property at high prices. They do not suffer from any of the subsidies' negative consequences. They do not remain in Israel, so they do not have to pay high prices for the housing services that they consume, and they do not pay any of the taxes required to finance these programs. Few Israelis would argue that government policies should encourage emigration, yet this is one of this paper's central conclusions: Israel's housing subsidy programs unambiguously enhance the economic attractiveness of emigration.

G. Conclusion

As can be seen, Israel's housing subsidy programs have perverse effects. Intended to benefit young couples and new immigrants, the programs' overall effect is to make life in Israel more difficult for these groups. Meanwhile, the programs encourage emigration from Israel.

Unfortunately, it is not uncommon to find government programs which, although supposedly intended to benefit one group (usually poor and politically weak), in fact benefit another (usually wealthy and influential). In return, the group that truly benefits rewards the political leadership that implemented the program with votes, campaign contributions, cooperation, or even outright bribes and kickbacks. In the case of Israeli housing subsidy programs, however, the most important beneficiaries--emigrants and foreign investors--enjoy virtually no political influence. Only the most fanatic conspiracy theorist would suggest that Israelis planning to emigrate or foreign real estate investors (most of whom are wealthy Jewish individuals partly motivated by Zionist considerations) lobby to promote housing subsidies, let alone pay bribes to Israeli politicians.

There is no sensible political justification for Israeli housing subsidy programs. Israel's housing programs are, quite simply, the result of profoundly misguided and inept policy making. The closest analogy is when a football team accidentally scores an "own goal." An "own goal" is hardly the result of calculated decision making.

Part V