Tuesday, 6 September 2011

An affordable home? Certainly, madam. Would you like that wrapped?

This summer has been one long series of rallies. The protests, loosely led by the taxpaying, hard-slogging, reserve-duty-serving, middle-income earners of Israel, are predominantly about the lack of affordable housing in Israel, particularly in the most popular parts of the country.
Property prices have indeed skyrocketed in recent years, while incomes have barely moved. And some of the banner-waving crowds argue that this clearly shows that capitalism has failed, and blame the free market. Down with the tycoons, they shout, accusing the prime minister of giving in to the developers, helping them get richer while Mr and Mrs Average fall far behind in the ratrace. A typical apartment in Israel today costs the equivalent of 114 times the average monthly salary. Compare that to the average home in France costing 90 times the average wage there, or 71 in Britain, or just 54 in Germany.
Israelis, on average, have reason to despair.
But I don't think the free market is to blame. On the contrary, the situation we are in today is because THERE IS NO FREE MARKET in housing in Israel.

First let's all agree on what a free market is. If you imagine a typical old market scene, such as in this delightful picture from Cambridge England, then you're already on the right track. It's where lots of buyers and sellers meet. Economics (the study of how we use and distribute scarce resources) goes a little further to describe what it calls a perfect market. It makes some assumptions such as: everyone acts rationally, which, for arguments sake, let's say, is true even in Israel; there is perfect information, i.e. everyone's aware of what's happening in the market; no one buyer or seller dominates the market (and hence the price), and there are no barriers to anyone becoming a seller; and the good or service is homogenous i.e. each product is identical.
Sounds idealistic? Unreasonable? Exists only in textbooks or in the minds of professors and philosophers? Not so. The market in Teva shares, let's say, is a fine example. It's a homogenous product; there are millions of buyers and sellers; no one stops you selling; and it's pretty easy to keep track of prices.
So what? I hear one or two of you asking. So we have a free market. What good does that do anyone? Where's the social justice in that? Hold on, hold on, my little pumpkins, we're not there yet.
The result of such a perfect market is the "right price". And what do I mean by the right price? I mean the price that clears the market.
If the price is "too high", two things happen: more sellers step in to cash in on the top price, and two, buyers get put off as it's too costly. True? In other words, supply rises and demand falls. These two work together to push the price down.
Conversely, if the price is "too low", some suppliers will get discouraged, pack up and go home, waiting for a better occasion to make their profits, while more buyers will rush to the market to snap up a bargain. Result? Supply falls and demand rises. Both of these move to push up the price.
So buyers and sellers interact in the free market until they reach the "right price" (or what economists call, the equilibrium price), where supply meets demand. Ten people are shopping for the goods, and ten goods are on sale at the price they're prepared to pay. Voila, everyone's happy. The market clears.
Now let's look at housing in Israel. It's a far far cry from the free market. Prices today are "too high", which according to our theory should encourage suppliers to rush to market, putting more of the product on sale. And buyers should slink off home. But they can't slink off home. They haven't bought one yet - it's the housing market, dummy! "Home" is the very product on sale. It's a little more essential to life than a Teva share. So demand does not slack off.
What about supply? Well one of the features we mentioned of a free market was the multitude of suppliers. And suppliers of housing can't build on thin air, they need land. The State, mostly in the guise of מינהל מקרקעי ישראל or the Israel Land Administration (boo, loud noise, jeers) owns over 93% of all the land in Israel. The ILA is terribly reluctant to sell, and not all that keen on renting it out either. So the nanny State of Israel, as the largest landowner, is strangling the housing market, by refusing to allow supply of housing to rise.
It's not the free market that is to blame for a lack of affordable housing in Israel today. The extortionate prices of housing is a textbook indication that someone - the state, let's call it the Soviet Republic of Telavivopolis - is not actually allowing a free market to exist. Go figure.

1 comment:

  1. I was with you until the end. Land is not a commodity like any other--it belongs to us collectively, we have a limited amount, and it shouldn't be distributed at will to the highest bidder to build huge villas.