If somewhere on the shores of the Mediterranean there was a country with impressive economic growth thanks to external investments, the average and median wages in the country increased. Incoming tourism has also increased and real estate prices? fly to the sky The majority of the population did not have the money to buy an apartment in the business center of the country and despite this, apartment prices continued to rise and rise. Even when the flow of investments decreased and the apartment prices stopped, they did not decrease. That country is called Greece, we know how the story ends there.
The real estate bubble in Israel is reminiscent of the real estate bubbles in Greece, Italy, Spain and Portugal. With the following significant difference: while those who financed the dramatic increase in the dollar value of civil servants’ wages in Greece and Spain were actually the Germans when the conduit was the European Union, in Israel the one who finances is high-tech exports (a large part of which is a bubble but that’s another story) when the conduit is the taxation system and budgets the government.
just to make things clear: Esther Hayut is the top earner or in the top two or three in the OECD, Esther Hayut earns NIS 104,000 a month, which is $385,000 a year. For comparison: a chief justice in Sweden earns at most $80,000 a year, a chief justice in Great Britain earns $260,000. The former Chief of Staff Aviv Kochavi earned twice as much as his counterpart in the US Army. In Israel. The Chief of Staff Harezi Halevi will receive a similar salary – of course this comes in addition to a budget pension. why is it important? Because these are civil servants and while beginning teachers receive about NIS 7,000-9,000 a month – Hayut earns like 17 teachers, like 5-6 beginning judges! Such pay gaps and the fact that people get rich from public work create corruption, maybe not criminal corruption but moral corruption.
And real estate, because of the enormous financial significance in the timing of obtaining the various approvals, is a fertile ground for corrupt practices. When people in the system see that Esther Hayut arranges such a salary for herself, the message is “take as much money and benefits as you can (or knock you) out of the system” (and don’t buy the legends ‘it’s agreements, I have no control’ and the rest of the nonsense, this is the main thing, if not the only, that interests her).
Myth: Stocks go up more than housing prices
An apartment in Tel Aviv has increased from 2011 to this year by about 100%. The Tel Aviv 25 index also rose by 100% in a similar period, but – when you buy an apartment, you usually buy it with leverage, and let’s say you have good terms from the bank that you pay 1.5% interest on average per year, so if your collateral is 25% of the apartment’s value, a third of the 75%, you earned during the 10 years 300% even after tax deductions. The investment in concrete is more profitable.
Now let’s exaggerate the situation: let’s say you are a relatively senior public sector employee with a salary of over 25 gross + budget pension. You are married 45 years or older, you got your first apartment partly from family money. This is the second apartment, it is in Tel Aviv (let’s say Yad Eliyahu), and it has tenants who pay more than the monthly repayments. In that case, you can actually use that property that you still have to make payments on as collateral to take out another mortgage and that’s how you’ve effectively created a situation of leverage upon leverage and your entire profit from the initial investment.
Let’s say you are a 60-year-old judge and you started with real estate matters from the time you were a lawyer in the civil service in the 2000s, and your partner is also a civil servant – in that case there is a chance that you have reached a situation where you own 5 apartments in Tel Aviv, of which you live in one. You own a property whose value is between 5 and 10 million dollars, the monthly income from Shchad is around NIS 30,000 before tax, in addition to a budget pension. There are hundreds of judges who own 3 or more apartments, in a simple way any government decision that harms the interests of apartment owners will directly harm that judge or his colleagues on the bench and the meaning is clear: such a petition will receive full attention.
There is no shortage of examples: For example, the High Court buried the third apartment tax law that was made negligently, even though petitions against other negligent laws were rejected on technical grounds. Judges have another significant advantage – their ability to enforce agreements against unruly tenants is significantly better than that of a member of the public. The costs and the ability to deal with the legal system are expensive things that take a lot of time. Not long ago there was an affair in which suspicions arose that a judge was a pimp with his wife and that a judge slept with the Minister of Finance and a senior member of the Bar Association and the question was asked why people would do such things? There are few entrepreneurs who will come out with a profit of 10 million dollars and if you add a budget pension to that, then at all.
It’s not just the judges – 100,000 public servants
The judges are not alone, there are about 100,000 public employees (witnesses, military, judiciary, banks) in the top decile (some of them bring in 200,000+ dollars per year). With a budget pension or equivalent to it, such an employee from the moment he buys his first apartment – every eight years it pays for him to leverage and buy another one (leveraging on the basis of real estate insurance is one of the main reasons for the increases). This creates a demand for about 12,500 apartments for investment every year from the public sector, those who in advance benefit from better conditions in terms of mortgage compared to the rest of the public. There are quite a few judges who, in parallel with their tenure, manage the practice of renting apartments. The same is true for Bank of Israel employees, where the average pension cost for a veteran employee has crossed the 4,000,000 mark (for anyone wondering about their sluggish steps in this area) and they invest their capital in private real estate empires. The same goes for bank employees who enjoy preferential mortgage conditions.
What does discounted construction mean in the outskirts of Tel Aviv?
There is no point in building in areas far from Tel Aviv, nor in areas such as Ramat Gan or Givatayim. Real estate data from all over the world, historical and current, such as Zillow, Boston, MaSSP, show that the significant factors in real estate prices are location (distance from the city center), real estate prices in the vicinity, and the amount of taxes paid by the people who live in the residential area. Or in other words – location location and location.
So why does the treasury support programs like the Kahlon lotteries or Lapid programs, which are a waste of money? The answer is a lack of professional competence and a lack of understanding of forecasting models throughout the Ministry of Finance. These are economics faculty graduates who, at best, know how to open Excel and recite passwords in an intelligent tone. It is also important to be born into the right family, harmless connections. The common people will continue to suffer. Has anyone paid a price for the failure of a window program? After all, the most important thing is to tell the politicians what they want to hear.
In summary, the problem centers on:
1. Supply in the city of Tel Aviv where a bottleneck has arisen deliberately by reducing supply. Anyone who talks about increasing supply elsewhere is simply deceiving the public.
2. Long planning and execution times of real estate projects.
3. Long legal proceedings – in the State of Israel, legal proceedings on land real estate disputes take years. This means uncertainty for entrepreneurs, which translates into higher costs, in addition to side payments to landlords. As I recall, there have already been two prime ministers who have been involved in criminal matters related to real estate. All over the world, real estate matters are closely related to criminal matters. The reality in Israel where there are so many intersections on the way to taking a project from the planning stage to execution, when in fact at each such intersection the meaning of delay/speed is enormous financially, creates a fertile ground for various and different polluters. It can be a respected law firm and it can be an underworld person.
4. The high budget pensions. The high budget pensions provide certainty for long-term investments, allow real estate investors to leverage existing investments and actually become rich under the auspices of the state.
5. High government salaries.
6. Low professional level in the Treasury and the Bank of Israel.
Discouraging, so what is the solution:
1. Tel Aviv: Dramatically increasing the supply in Tel Aviv and placing it in favor of housing for public service workers such as teachers, police officers, social workers who work in Tel Aviv. The increase should be carried out by expropriating open spaces and rezoning existing commercial spaces to residential.
and also – Limitation on the number of privately owned apartments in Tel Aviv Prohibition on moving to one or two privately owned apartments in Tel Aviv.
2. Worsening the conditions of senior civil servants: there is no justification for the pension of two workers who received a similar salary and a worker who benefits from the protection of a strong committee receives a pension that is sometimes 3 times that of his friend who worked in the private market. The distortion concerns especially senior officials, for example outgoing state attorney Shai Nitzan provided himself with a budget pension of NIS 50,000 per month. This is about state-sponsored corruption, in which committees and people in positions of power leveraged bargaining power to benefit personal conditions.
and also – Lowering wages in the public sector for those with the highest salaries and setting maximum salaries.
3. Reducing options to leverage based on the value of existing assets. That is, leverage upon leverage upon leverage in which a person registers ownership of assets while paying a mortgage separately on each of the assets should be reduced to a single asset and that too with a maximum value of 30% of the collateral.
4. Aggressive war on corruption and slow implementation in the local authorities. Even if operative steps are taken in order to fulfill the above steps, they will encounter strong opposition from senior officials in the public service, judges and the most powerful committees in the economy. Those who think that rulings such as the Beget ruling that rejected the taxation of Kahlon’s third apartment are wrong It is the main means of wrong judges. They have a more powerful tool, which is delaying processes under different pretexts. There were a number of different cases, including the Ruth David and Ronal Fisher case (where, among other things, the trial of a senior attorney who received a suitcase of cash from a criminal went on for over 7 years and there is no end in sight), the Efi Neve Ayelet Shaked case and the appointment of the judges and the construction of Binyamin Netanyahu’s trial in all those cases the system was carried out Slowly, gently, it sent a message that we don’t want to fight with seniors. Without a fighting spirit, any effective initiative to lower apartment prices will encounter setbacks with the backing of senior judges. The public should be shown senior judges and attorneys being led in handcuffs to prison as the last criminals in order to convince the public that there is a determined system and that no one is above the law or the state. In the Roman Republic, when a judge was caught accepting a bribe, they would cut off his nose, put him in a leather sack with prey animals, tie the sack and roll it from the top of the mountain.
5. Switching to remote work wherever there is no regular public reception in the civil service and reducing the number of days civil servants have to come to the office. Removal of civil servants’ offices from demand areas to peripheral locations.
Anyone who avoids these steps confuses the minds of the public and those who fear that they won’t build -> guess what entrepreneurs want to gain? Of money. A determined government creates certainty and creates margins that entrepreneurs can make a good living from, entrepreneurs suffer more from disturbed land prices.
Now seriously nothing will happen -> everyone who donates to the big parties and all their heads are invested up to their necks in real estate in Israel, for something it really seems that when they come to power they will hurt themselves and go to war with the powerful factors in the economy and with their close friends. Get out of the movie, those who dream of a war against corruption, may our politicians and lawyers wake up strong against the weak.
Dr. Itai Ben Dan is a mathematician, an expert in algorithms and financial markets
To a previous article by Dr. Ben Dan:
