The rising prices are due both to increased demand – driven mainly by low interest rates and preferential tax treatment – and to rigid supply, rooted in bureaucratic complications of the construction process, an inherent conflict of interest at the local level, and a high prevalence of condominium apartment living in Israel, which poses an obstacle to urban renewal. In the short term, in order to reduce demand, it is recommended that rental income be taxed in a manner similar to capital market income. In the long term, in order to foster greater housing-supply flexibility and reduce the housing market’s high volatility, it is suggested that construction-related planning, approval and supervisory processes be simplified and decentralized, that income from development and the responsibility for laying the infrastructure necessary for that development be transferred to local authorities, and that the sale of apartment buildings based on tenant supermajority be authorized as an alternative to National Outline Plan 38 (known in Hebrew as TAMA 38) and vacate-and-build (known as pinui-binui) programs. It would also be desirable – so long as there is no negative impact on the environment or on the construction of future national infrastructure – to transfer the property rights to a large share of the country’s available land to local authorities and private entities.
This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2014, Dan Ben-David (editor).