The Land of (Expensive) Milk and Honey

One of the final straws leading to the major summer protests in Israel was the high price of cottage cheese.  A comparison conducted by Nir Eilam, a Taub Center researcher, using OECD data from 2005 indicates that dairy products (specifically, milk, cheese and eggs) in Israel were 6 percent more expensive than the average prices in the OECD (first figure).  By 2008, this gap grew to 44 percent.  The prices of food and non-alcoholic beverages, which in 2005 were 16 percent cheaper than the OECD average, grew in the span of merely three years to 16 percent above the OECD average.  Agricultural commodities remained less expensive in Israel, although the gap narrowed from 40 percent below the OECD in 2005 to 13 percent below in 2008.

Taub Center researchers found that prices in Israel were not higher in all areas. It turns out, though, that even in areas where prices were relatively low in 2005 – including education, health care, communication, and fruits and vegetables – prices had risen considerably by 2008; in some cases, prices that had been lower than in the OECD in 2005 exceeded prices in the OECD by 2008.

Two of the largest household expenditures are on cars and housing. In 2005, motor vehicles cost 46 percent more in Israel than in the OECD. This price differential grew to 70 percent by 2008. According to Prof. Dan Ben-David, Executive Director of the Taub Center, the lack of free competition in importing cars to Israel allows a small number of importers to raise prices on vehicles disproportionately to the markup in Western countries.

Housing in Israel is quite expensive as well. As a rule of thumb, it is generally considered very difficult to purchase an apartment if its cost is greater than five years of income. Data from the Demographia International Housing Affordability study divides median house prices by annual median household incomes (see figure) and shows that in the U.S. only 2.9 years of income are needed on average to buy a home. In Canada and Ireland this rises to 3.7 years, in England to 5.1, in New Zealand to 5.7, and to 6.8 in Australia. In Israel, it takes more years of work than in each of these countries, with an average of 7.7 years of work needed to buy an apartment.

In fact, Israelis need to put in more years of work for a home than residents of 32 of the 33 English metropolitan areas (see third figure). Even in London, “only” 7.1 years of work are needed to purchase a home. Housing in Israel is more expensive than in any metropolitan area in Ireland and New Zealand, and it costs more than in 174 of the 175 metropolitan areas in the United States. Even housing in New York City requires fewer years of work than housing in Israel.

According to Professor Ben-David, a policy response focusing primarily on the symptoms is not the way to reduce housing prices. It is necessary to focus on the roots of the problem, and he proposes a number of policy directions:

1. Reform in the Israel Land Administration. The State owns more than 90 percent of the land in Israel and the housing market is greatly affected by government behavior. A comprehensive reform of the Israel Land Administration is required so that it will cease to operate as a monopoly maximizing profits at the expense of the general public.
2. Developing the periphery and making it accessibile. The low level of educational achievement in periphery areas and the lack of rapid, available and inexpensive access to workplaces in major cities prevent many young families from moving to towns where larger homes are available at lower prices. While comprehensive education reform is necessary countrywide, its importance is particularly critical in the periphery. In a country with only half as many cars per capita as the Western average, and roads that are more than twice as congested, the time has come to substantially increase the investment in transportation infrastructure, and to catch up after decades of lagging behind. Despite some increases in this regard, Israel’s national investments in transportation infrastructure have risen to average OECD levels (as a share of GDP), but that is far from sufficient if the country intends to close the very large infrastructure gap that has opened up over the years.
3. Dormitories for students. Each of Israel’s four major cities is home to at least one university, with 18,000-29,000 students in each. The time has come to build sufficient housing on the existing campus areas – by building dormitory buildings vertically instead of horizontally – in order to significantly reduce student demand for what have become exorbitantly priced apartments in these cities. As a result, the investment demand for housing will decline and thousands of apartments will become available for young families who are unable to afford current prices. As a bonus, the students will live within walking distance of campuses, will be able to spend more time at their studies and will substantially reduce the congestion on the already-crowded roads.

One common factor contributing to the higher prices in Israel, be they in homes, consumer goods, or other areas, is a very cumbersome government bureaucracy. For example, Ben-David uses World Bank data and shows that the number of days required to open a business in Israel is higher than in 32 of the 33 OECD countries (fourth figure). Whereas in Australia it takes two days to start a business, in Canada five days, in the U.S. six days, and in France seven days, in Israel 34 days are required – nearly three times the OECD average. Instead of resources being devoted to lowering costs and hence prices, a substantial amount of time and money is lost in what should be a routine process of starting a business.

The summer protests in Israel did indeed touch a very basic nerve, even though they were based primarily on symptoms, or the “tip of the iceberg.”  The iceberg itself, which is the primary focus of much of the Taub Center’s research, reflects standards of living that since the 1970s have been steadily falling farther and farther behind the West (the current major recession is an exception to these long-run trends) and rates of poverty and income inequality that are much higher today than they were in the 1970s and 1980s and considerably higher than in most OECD countries.

The combination of relatively high prices and low incomes in Israel – compared to the industrialized West – is taking its toll in a number of ways.  One reflection of this during the past summer was the strike by the country’s physicians, whose cutting-edge training and abilities put them on a par with the best in the West, while their incomes lag well behind. In protest, many of the younger doctors quit en masse and the courts intervened to prevent their resignations for fear of the severely negative impact that this would have on healthcare in general and on emergency care in particular.  This issue has just been resolved in a manner that may have major reverberations on labor negotiations in the future.

In the academic realm, resignations have been substituted by a major brain drain from the country, one that is extremely severe in some fields that offer substantially higher compensation abroad.  Here, too, major inroads have recently been made to try and reverse the process.  Unfortunately, this is primarily symptomatic treatment for a major underlying problem.

Prof. Ben David summarizes that a situation combining state-of-the-art training with compensation that is increasingly not reflective of such ability is not a viable steady-state process.  When living costs are also rising disproportionately in relation to the West, it is not surprising that 400,000 Israelis in a country with less than eight million people took to the streets on one summer night in protest.  He adds that a combination of long-term planning focusing on a substantial improvement in the country’s human capital and physical capital is needed to deal with the primary underlying problems faced by Israel.  This needs to be complemented by a comprehensive policy emphasizing the common good versus that of narrow interest groups, one that is accompanied by appropriate regulation to deal with market failures.