Israel’s recent housing woes are just the tip of the iceberg
Anyone who has tried to buy a home in Israel in recent years can tell you that things are tough. Our analysis shows that the situation is even worse than the official figures suggest.
The ability to purchase housing, so-called housing accessibility, is a key issue for officials crafting housing policy. A common index for measuring housing accessibility is the ratio between the price of a home and the household’s disposable monthly income, meaning income after taxes. This ratio is a tool to measure how long it takes for a household to buy a home; while the dry calculation of the number of months of net income ostensibly presumes the family has no other expenses other than saving for a home, obviously that’s not actually the case.
A high price-to-income ratio is usually interpreted as meaning that families are hard-pressed to find housing, but there are two ways in which this does not reflect the full picture.
First, it does not reflect situations where households are living in homes that are too small for them. For example, a family of seven living in a three-room apartment would result in a relatively low price-to-income ratio, and the dry statistics would understate the household’s housing problem. On the other hand, a household of two people living in five rooms would present a relatively high price-to-income ratio, so the statistics would overestimate that household’s housing problem.
Second, the price-to-income ratio ignores the correlation between the value of a family’s home and the family’s income. In other words, high-income households tend to live in relatively expensive homes, while low-income families tends to live in relatively inexpensive ones.
Thus, simply calculating the correlation between a family’s income and the value of their home leads to an underestimation of the gaps in different income deciles’ ability to buy homes.
After adjusting for the above, we’ve discovered that over the past two decades, the number of salaries required to buy a home jumped even more than previously thought, and the social gaps are far wider than official figures show. To close them, Israel badly needs a policy to promote suitable housing for lower-income families.
Normalized housing value
Using Israeli market figures, we estimate the relationship between the value of a family’s current home, the number of adults and children in the household, and the family’s disposable income.
This lets us calculate a “normalized housing price” – the average value of a home in Israel for a family of a certain size and a certain net income.
The normalized housing price adjusts both for the under- (or over-) consumption of housing services and for the correlation between a household’s income and the size of its home.
Therefore, for every household in our sample we calculate the average value of a home for a family with a similar number of adults and children and a similar net income – in other words, all further calculations are based on a normalized housing value based on each household’s characteristics.
Thus, we calculate the normalized price-to-income ratio, the ratio between the normalized value of the home and the household’s net income. This enables us to examine the ability of each household to buy a home based on its actual needs.
We then compare the normalized price-to-income ratio to the ratio we get without the above-mentioned adjustment, which we refer to as the traditional price-to-income ratio in a traditional calculation. Our findings are similar in quality to initial findings in a similar analysis we conducted regarding households in selected cities in the United States during the same period.
Ultimately, we see that Israel’s housing shortage is far deeper and broader than it seemed using the traditional price-to-income ratio.
Based on our new calculation method, in 2022, Israelis (both Jews and Arabs) needed 187 months on average to buy a home (as opposed to 161 months according to the traditional measurement). Moreover, the number of months required to buy a typical home in Israel has doubled from 93 in 2003.
Half of Israelis live in homes that are too small
And what about the value of the homes where Israelis are currently living? While the normalized value we calculated for a home suited to those in the lowest and second-lowest income deciles is 2.82 million shekels ($780,000) and 2.78 million shekels, respectively, the value of the home in which those families actually live is lower by 30 percent and 22 percent on average (1.97 million shekels and 2.16 million shekels, respectively).
On the other hand, the average normalized value we calculated for a home that would suit those in the two highest income deciles is 2.76 million shekels and 2.7 million shekels, respectively, while the average value of the home in which these families actually live is 19 percent and 44 percent higher (3.29 million shekels and 3.88 million shekels for the ninth and 10th deciles, respectively).
Our figures show that poor people in Israel live in unsuitable homes because the average number of people per household declines as income deciles increase, from 3.7 people per household in the lowest decile to two people per household in the top decile.
Meanwhile, the affordability of homes in Israel is worsening by other measures too, such as the average price ratio based on median net income. Not only has the housing affordability for all deteriorated seriously in the past two decades, the gaps between the income groups are growing, far more than what is evident from the pre-adjustment assessment.
According to the traditional calculation (that is, based on the actual value of the home purchased), in 2022 the half of Israeli households earning below the median income needed the equivalent of 195 months of monthly net income on average to buy a home (compared with 105 months in 2003).
But when normalized home values are taken into account instead — which reflects the family’s presumed needs, and not what they ultimately bought — these families needed to spend the equivalent of 251 months of net income as of 2022, up from 131 months in 2003. This calculation is about 30 percent higher than the traditional estimate.
On the other hand, the half of households whose income falls above the median needed only 104 months on average to buy a home, based on normalized housing costs (compared with 51 months in 2003).
Growing gaps can also be seen when comparing the Jewish and Arab communities. In 2022, Jewish Israelis needed 181 months of income on average to buy a home that suited their needs, based on a normalized home value calculation, while Arab Israelis needed 240 months – a gap of 33 percent. In 2003, Arab Israelis needed only 127 months of income, reflecting a 90 percent increase in the income needed to buy an appropriate home over two decades.
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- The road to buying a home in Israel is only getting longer
- The uphill battle of Israel’s first-time home buyers
Because the Central Bureau of Statistics examines Arab households in mixed Jewish-Arab communities only, our findings sugarcoat the real picture. The results paint a very gloomy picture not only of the housing shortage in 2022 but also for the future.
It’s still possible to address these gaps using policy tools that promote suitable housing for all households. But for this to happen, the political decision makers must place this goal at the top of the country’s priorities.
How we calculated: Our analysis was based on all real estate transactions in Israel’s 20 largest cities that were reported to the Israel Tax Authority from 2003 to 2022 — more than 655,000 transactions in total — and on income-expenditure surveys conducted by the Central Bureau of Statistics from 2003 to 2019. Because the statistics bureau has not yet released more recent data, calculations for the years 2020-2022 used 2019 figures adjusted based on the statistics bureau’s income index for the relevant period.
Prof. Danny Ben-Shahar, a finance and real estate professor, heads the Alrov Institute for Real Estate Research at Tel Aviv University’s Coller School of Management.
Prof. Stuart Gabriel heads UCLA’s Ziman Center for Real Estate and is Arden Realty chair and a finance professor at the university’s Anderson School of Management.
Dr. Elior Cohen is an economist in the Economic Research Department of the Federal Reserve Bank of Kansas City.