Lawrence Gulotta is a New York-based observer of Israel who is informed by a background in real estate economics and affordable housing finance. This post is the second and final segment of his article. (Click here for the first part.)
A Matter of Housing Equity continued…
Israel needs to adopt new approaches and reform measures to create affordable/starter homes. Housing prices and rents are difficult for young couples to reach on their salaries. In Israel’s case, the government owns over 90% of all land, so it is certainly within its control to find many creative solutions to assist buyers and renters to make housing affordable.
Although Israel has a high homeownership rate by international standards, in the past 15 years, the homeownership rate in the country has been gradually declining as more households are renting due to the shortage of affordable housing. In 2008, the homeownership rate was 68.8%, down from 73% in 1995.
The many luxury high-rise residential towers planned for downtown Jerusalem and Tel Aviv also stand in stark contrast to the difficult state of housing affordability in the Region.
The following schedule from the Bank of Israel illustrates the problem of soaring sales prices across Israel’s three major cities and by region:
Jessica Steinberg notes in her JTA article of 08/2011, entitled, “Just how expensive is it to live in Israel?”:
According to figures from the real estate company RE/MAX Israel, apartment prices in central Tel Aviv run $5,714 to $7,142 per square meter. In Jerusalem, the peripheral neighborhoods of East Talpiot and Kiryat Hayovel offer housing from $4,285 to $5,714 per square meter, while prices in the tonier neighborhoods of Baka, the German Colony and Rechavia range from $7,000 to $8,571 per square meter.
That means that in Baka or the German Colony, a typical two-bedroom apartment starts at $428,571, according to Alyssa Friedland, a broker for RE/MAX. In the peripheral neighborhoods, some of which are built on territory captured from Jordan in the 1967 Six-Day War, a two-bedroom apartment runs for about $343,000. According to RE/MAX figures, two-bedroom apartments in Beersheva, Haifa, Hadera and Afula cost between $143,000 and $286,000.
Zionism’s founding father Theodore Herzl maintained a vision of a limited-equity model of home ownership for Israel. This model has worked effectively in the US to create affordable housing. The most promising aspect of the limited equity model is that, when it works, it truly frees its participants from dependence on predatory bank lending and the regulatory actions of the state.
What makes “mutual cooperative housing” more democratic, affordable and egalitarian than other forms of multi-family housing?
Mutual cooperative apartment units require an initial, modest down payment; significantly, there is no direct mortgage loan or “end loan” to the homebuyer, thus eliminating the need for commercial banks, mortgage brokers, and so on. The homeowner assumes a “proportionate” or “pro-rata” share of the project’s total underlying mortgage obligation. Profit at resale is limited to fixtures installed by the owner. Apartment owners receive an income tax deduction for their proportionate share of real estate taxes and mortgage interest paid, thereby giving them the tax benefits of homeownership. At present, it is not possible for an Israeli citizen to deduct interest charges from their personal income tax. There has been talk about this becoming possible in the future.
Risk of default by an apartment owner is minimized, again collectively, by spreading default risk equally to the other cooperative owners. The governance of the co-op is democratic by design, if not always in its execution. Democratic politics takes place within the co-op. A board of directors must be elected annually to administer the budget and maintain the project. Political parties, cliques, and factions develop and compete for seats on the board. It is not the architecture as much as the form of ownership and governance that is democratic. The limited equity mutual co-op is more egalitarian than any other form of multi-family housing.
There is a long tradition in support of “mutual cooperative housing,” pioneered by old-line social democratic trade unionists for their memberships. Numerous union-sponsored housing developments have proven to be an important solution to housing crises. This type of multi-family housing promotes democratic governance and social equality. It is “affordable housing.”
On a relatively large scale, in NYC, there is Penn South, Co-op City, and East Harlem’s 1199 Plaza. Penn South was sponsored by a local of the International Ladies’ Garment Workers’ Union headed by Charles Zimmerman. The Amalgamated Clothing Workers also built many thousands of units in the Bronx. There have been inspiring, long-lasting successes, and some near failures. The successful projects are examples of “democratic housing” in the metropolis. The near failures have succumbed to bureaucratic governance, mediocre building quality and uninspired Soviet-style architecture.
Israel has an opportunity to re-cast the limited-equity cooperative model of multifamily housing to its own needs. The limited-equity model is flexible, affordable and democratic. The limited-equity cooperative is structured to make the dream of a home or apartment of one’s own affordable to the working class, moderate income and low income Israelis. It is not the only solution, but it is a viable one for Israel’s cities and suburbs.
An Israeli Affordable Housing Corporation (“IAHC”) can be created and funded annually by the Knesset. The role of the IAHC would be to offer financial assistance to income-eligible first-time home buyers for new construction, acquisition/rehabilitation and home improvement. The IAHC would issue a ten-year self-extinguishing conditional grant at 0% interest to income-qualified first-time home buyers. The homebuyer must reside in their home for ten years, and the principal balance of the grant is reduced annually until it is extinguished in year 10. If a sale occurs during the ten year residency period, another income-qualified family may assume the grant. If not, repayment of the balance due on the grant is made from proceeds of the sale. Typical grants average $35,000-$40,000 per unit in high cost areas.
Self-extinguishing grants have been issued by the US government since the enactment of the 1862 Homestead Act, during the Civil War. The Homestead Act required a five-year residency period.
Israel can create its own mortgage agency to assist first-time homebuyers, thereby circumventing the absurdly restrictive impositions and vagaries of the market. Mortgage loans can be financed through the sale of tax-exempt bonds. In the United States, tax-exempt mortgage bond programs generally feature competitive interest rates, low down payment requirements, flexible underwriting guidelines, no prepayment penalties and down payment assistance. Each of these features is designed to make a home purchase more affordable. The limited equity cooperative can be financed with tax-exempt bonds or more traditional bank financing.
Information Resources for “A Matter of Housing Equity”
Jewish Telegraphic Agency
Global Property Guide-Israel
Bank of Israel
Bank of Israel, 08/03/2013, “Average Rate of Interest on CPI-Indexed Mortgages”
First Tuesday Journal, August 1, 2913, “Current Market Rates”
New Israel Fund, “Israel’s Affordable Housing Protest Catches Fire,” Written by Ruby Ong
New Left Review 81, May-June 2013, Dr. Yonatan Mendel “New Jerusalem”
The Appraisal of Real Estate, 13th edition, Appraisal Institute.