Is there a real estate bubble in Israel?

This s one of the most loaded questions in Israeli everyday small talk: is there a bubble or not? After all, the prices went up nearly 80%since 2007, and the average middle class can no longer afford to buy a home without serious equity, so it must be a bubble, right?

Despite what some responded here, the fact prices are insanely high does not mean there is a bubble. It depends what are the REASONS for these prices. It all boils down to supply and demand:

In Israel, there is a shortage of land. I don’t mean absolute acres of land, but land on which you can build houses on.

Why?

Here is a short lesson in economic history: in Israel, 97% of the total land mass is government owned. Here comes to play the notorious Israeli bureaucracy: as a reminder of the socialist era (some call it Bolshevik), when it comes to planning, building and getting permits, everything has to go through one of the most inefficient systems known to mankind. Now, let’s say you found a nice piece of land and you want to buy it and build a building or a house on it. This is how it goes:

1. Is the land private or government owned?

2. Government-owned? Wait until it will be included in the national and municipal urban planning and offered to the public under a tender. It can take anything between 5 and 50 years. There are north to Tel-Aviv some orchards from the 1950’s still waiting to get included in the plans.

3. Privately owned? lucky you. Now go check in the public records if it is approved for housing.

4. Not approved? Go back to bullet #2

5. Approved? Lucky you (and even luckier is the guy who sold it to you who just made a ton of money). Please go and file a plan with the municipal authority. If they’re cooperative you will get the paperwork done in under 2 years(!).

6. Once you got all the approvals, it should take another 18-24 months to complete the construction due to use of outdated techniques.

As a result of the insanity I just described, it takes 4-8 years in Israel to approve urban planning and build houses. The growth in number of homes simply can’t put up with the growth of population in certain areas, that is why in Israel you have a housing crisis and not a housing bubble. The government is struggling to find shortcuts for solutions like taxing people with more than one apartment or giving grants to people with no apartments, but that's a drop in the ocean. The real solution is to speed urban planning by outsourcing it to external contractors supervised by the municipalities and release more lands to sell to the public, but when someone in Israel says “let’s outsource <anything> to a private contractor” the unions (“Hahistadrut”) are immediately on their feet to stop this.

Until this mess is solved, I don’t know if prices will continue to rise, but they surely won’t go down significantly.

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