Israel is a middle-income country. But its housing prices are as high as those in the richest countries, well beyond the financial means of the average household. High housing prices and high rental costs are especially daunting to newly-married couples, recently discharged veterans, and newly-arrived immigrants, who have neither the funds for a down payment nor the income to finance a large mortgage or pay high monthly rent. To assist these groups, the government of Israel provides rent and mortgage subsidies and this policy is formally supported by all of the major political parties in Israel.

So, that takes care of the problem? No! Indeed, these subsidies harm the very people they are intended to help. Dr. Jonathan Lipow, a lecturer at Hebrew University, Rehovot, applies the tools of economic analysis to assess the costs and benefits of Israel's housing subsidy program. He finds the following:

* The benefits of housing subsidies accrue to suppliers of housing, not consumers of housing. New immigrants and young couples do not receive any direct benefit from housing subsidies. However, new immigrants and young couples pay their share of taxes required to finance these subsidies. Israel's housing subsidies, therefore, are a burden on these groups.

* Housing subsidies effectively drive up rents. Those who cannot afford to purchase a home are hurt by housing subsidies. When they enter the housing market, they face higher prices. And, through their taxes, they finance the cost of the subsidies.

* Current homeowners neither gain nor lose from the housing subsidy programs in terms of their own immediate housing costs. However, since members of this group pay the lion's share of Israeli taxes, the housing subsidies are a burden on them.

* Israeli and foreign real estate investors are major beneficiaries of housing subsidy programs.

* Emigrants are major beneficiaries of housing subsidy programs - they can sell or rent their Israeli property at high prices, but do not have to pay high housing costs or any of the taxes required to fund the subsidies.

In short, Israel's housing subsidy programs have perverse effects. Intended to benefit young couples and new immigrants, the program makes life more difficult for these groups. Meanwhile, the programs encourage emigration from Israel. Lipow offers several reforms, including outright elimination of the subsidies, which would improve the welfare of young couples and immigrants.