Israeli Protests

As you may have noticed from the news, Israel has been experiencing large civil protests/demonstrations, primarily over the price of housing, but generally over “cost of living issues.” Given that Israel currently has the best-performing economy in the OECD, with over 5% annual GDP growth and 6% unemployment, you may be wondering “what the heck is going on?”

First, one has to understand the disproportionate importance of housing in the Israeli psyche. It’s the “Israeli dream” to own one’s own apartment. Most Israelis live with their parents until they marry, and then expect to buy an apartment, immediately, usually with significant financial help from the newlyweds’ parents. Renting is socially unacceptable, a sign of failure. Moreover, Israelis are distrustful of the stock market (which used to be incredibly corrupt), and consider an apartment not just a home but their primary investment.

Meanwhile, housing costs in Israel have skyrocketed over the last several years. For example, my sister-in-law’s apartment, which she purchased six years ago for $300,000, now fetches almost $1 million–a result of a booming economy, immigration, foreign purchases (especially by those with valuable Euros), speculation, and pent-up demand following a long downturn during the Second Intifada. And of course despite the recession in most of the world, the healthiest economies–Canada, Australia, Israel China–still seem to be the in the throes of the housing bubble that popped in the rest of the world, thanks to loose monetary policies.

Israel is especially vulnerable to boom-bust real estate cycles because the vast majority of land is publicly owned, and getting permission to build on this land, or even to tear down existing small buildings and replacing them with high-rises, requires going through a convoluted and sometimes corrupt process that takes years. By the time builders respond to demand, a bust may be at hand.

The obvious solution, which the Netanyahu government is pursuing, is to make it easier to build new housing, which will increase supply and reduce prices. The protestors, however, aren’t interested in this, and instead want government housing assistance and government-built housing, for two primary reasons.

First, Israelis, despite a great liberalization of their economy since the mid-80s, are overall probably no less socialists at heart than, say, Greeks, and no more sympathetic to or understanding of, free market economics. I say, “increased supply with steady demand will bring lowered prices.” They would respond, “increased building will simply put more money into the hands of real estate developers, who will continue to price gouge.” The idea that housing prices are set by supply and demand, rather than by greedy developers, isn’t well accepted. (Consider how even in the U.S., politicians blame “greedy oil companies” when gas prices rise.)

The second reason is more subtle: young Israelis who want to be able to afford housing don’t actually want prices to come down. The unaffordable apartments that currently exist, after all, are owned by their parents. While Americans typically see an inheritance from their parents as a windfall, Israelis see it as an entitlement. Your average 20- or 30-something Israeli includes their parents’ apartment, its value divided by the number of siblings, in their long-term wealth. So, oddly enough, the protestors want affordable housing so they can buy apartments and fulfill the “Israeli dream,” but they don’t actually want prices of existing apartments to fall!

There are two additional factors feeding the protests. The first is that public employees–teachers, physicians, social workers, and so on–feel put upon. The private sector is booming, and salaries have risen dramatically. But public sector salaries haven’t kept pace. In Israel, where it’s not considered at all rude to ask a new acquaintance how much money they make a month, everyone keeps score of such things, and government workers resent how far they’ve fallen behind people with similar education, especially high-tech workers.

Second, Israel has a ridiculously high cost of living compared to the U.S., where many Israelis have relatives and even more have spent time traveling or working. Many things–cars, gas, electricity–are heavily taxed, and many other items are costlier than they need to be due to import restrictions or monopsonies inherited from Israel’s Socialist days. I know several Israeli families who own clothes dryers–a relatively new thing in Israel–but rarely use them because electricity is so expensive. [There are some obvious free market solutions to these concerns, but, again, relatively few Israelis are sympathetic to markets.]

One thing that’s NOT really feeding the protests, contrary to some media reports, is “inequality.” One hears often from the Israeli left that Israel has among the greatest disparities in income of all industrialized countries, but those statistics are largely an artifact of the fact that while almost all “secular” Israeli adults are employed, in the Arab sector (20% of the population) very few women work, and in the Haredi sector (over 10% of the population) 2/3 of men don’t work. Also, the center of the country has far more economic opportunity than the periphery. Given that the protestors are overwhelmingly secular young Jews from the center, these concerns are quite obviously not at the forefront of the protests.