This past summer, my niece and nephew – along with a few thousand other families – entered a lottery to purchase an apartment “on paper” in a new project being developed through Israel’s Mechir Le’mishtaken program. When they won the right to purchase an apartment at a subsidized price, they asked me whether they should buy.
The Mechir Le’mishtaken buyer’s lottery program, created by Finance Minister Moshe Kahlon, offers subsidized pricing for couples, or singles over the age of 35, buying a first home. For each project in this program, the government sells the land at a highly discounted price through an auction. The developer who submits the proposal with the lowest apartment prices wins the bid.
We recently had a lively discussion with Tzvi Shapiro, co-founder of First Israel Mortgages, after Kahlon announced the extension of the lottery program through 2019. This article is a summation of our conversation.
On paper, the Mechir Le’mishtaken program sounds like a noble cause, as it enables thousands of young couples currently renting apartments or living with their parents to purchase and move into a home of their own. Unfortunately, this utopian vision does not reflect reality.
The Achilles heel of the program is that the purchasers are not required to live in these properties. Between 60% to 80% of the eligible purchasers entered lotteries for apartments in cities where they did not live. While many families intend to find new jobs and schools for their children close to their new subsidized apartments, most owners intend to rent out these units with the hope that the rental income will cover their mortgage payments. In addition, this program allows buyers to finance up to 90% of the price, compared to the 75% maximum mortgage ceiling for purchasers of a first home. These highly leveraged investments carry concomitant risk.
Furthermore, we are concerned whether there will be sufficient demand for the thousands of apartments being developed in locations such as Ofakim and Kiryat Shmona, especially as these new neighborhoods being built in secondary locations currently lack buildings to house schools, shuls and kindergartens. Until these facilities are built, the lack of communal infrastructure may deter families from renting in these communities. If the thousands of young couples enrolled in this program cannot find renters, many of them will default on their mortgages, which can potentially cause great harm to these young families and irreparable damage to the real estate market.
We believe a wiser approach would be for the government to assist young couples who build homes which they will occupy, as opposed to creating an army of landlords speculating on the rental market in burgeoning communities.
One option is to terminate the Mechir Le’mishtaken program and, in its place, provide first-time homebuyers up to 95% financing on condition that they occupy the apartment for a minimum of five years. With the roughly 2 billion NIS per year saved by scrapping this existing program, the government could provide guarantees to the banks for the extra 20% financing above the traditional 75% financing. Although this solution does not provide the deep discounts that the Mechir Le’mishtaken program offers, the 95% mortgage would allow first-time buyers to purchase apartments that they would otherwise not be able to afford.
In addition, young purchasers seeking inexpensive apartments can choose to move to peripheral locations where housing prices are significantly lower. With the implementation of Israel’s upgraded highway and train system, many formerly remote locations are no longer considered “too far away,” and these cities provide young families the opportunity to obtain low-priced housing while still having access to the country’s large employment hubs.
Returning to my niece and nephew’s dilemma, they won the right to purchase an apartment in a project located on the outskirts of a relatively large city. Accordingly, they decided that the risk of not renting out the apartment was relatively small – compared to projects situated in tertiary locations – and they moved forward with their purchase.
Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at email@example.com.