As in many places in the world – such as the US, the Netherlands, and Germany – Israel suffers from a real estate bubble. The price of residential real estate has doubled in the last eight years, causing economic and social problems across the country. Young couples cannot afford to buy a home and have difficulties in coping with rental prices. If this situation continues, it will be a huge problem for the mortgage market –for both the households and the finance industry.
The Israeli government is making huge efforts to increase the supply of new housing solutions and has increased taxes on real estate investors to reduce demand. Research shows that, despite all of these steps, about 20% of all purchases are for investment purposes. In an environment of almost zero interest rates, private investors avoid buying bonds because of market expectations on a rate increase. Investing in securities becomes much riskier, taking into consideration the high multipliers. The apparently safe investment remains investing in real estate, especially apartments and houses. Such decisions are supported by low-cost mortgages, caused by the low interest rates. This causes an increase in real estate prices in Israel, as in many countries around the globe.
This situation calls for new approach and TOC offers a new way of observing the problem. A focused Current Reality Tree (fCRT) analysis reveals four core problems:
- No clear government real estate policy
- Ineffective and inefficient production of new housing
- High yield for investment in residential real estate
- Almost no alternative to residential real estate investment
The 1st core problem: No clear government real estate policy
Using the 7 focusing steps we have identified some policy constraints, but the main constraint is the lack of available residential housing land. Following the 7-step analysis a full policy can be derived: exploiting, offloading and subordinating.
The 2nd core problem: Ineffective and inefficient production of new housing
This problem can be solved by using critical chain project management (CCPM) in the production process (design, regulation, planning, construction, etc.) which takes about 12 years. As the government owns most of the land in Israel, this process is very cumbersome and bureaucratic.
The 3rd core problem: High yield for investment in residential real estate
This problem can be resolved mainly by taxation tools and intervening in the mortgage market.
The 4th core problem: Almost no alternative to residential real estate investment
This issue is not being taken care of, and we suggest a TOC-based solution. Using the Conflict Resolution Diagram (CRD) we can find a win-win solution.
The above CRD presents the private investor's dilemma: in order to make a safe and liquid investment he or she would like to invest in capital markets. In order to gain stability and financial leverage he or she would invest in residential real estate.
We suggest a win-win solution to this private investors' conflict by issuing a bond that imitates the price of residential housing.
The "Real Estate Bond"
- The bond will be issued by the state of Israel.
- The bond will be in the amount of 2 billion dollars per year (about 20% of total investment)
- The bond will imitate the average price of residential housing as determined monthly by the Central Bureau of Statistics.
- The bond will carry a 2% annual interest.
- The bonds will be issued on the Israeli stock market and will be tradable from day one.
- The bonds will be limited to private investors.
A survey shows that 40-50% of potential investors will consider buying this bond as an alternative to purchasing an apartment. As we do not have clear data on the demand curve we assume that the issuing of "Real Estate Bonds" will reduce the demand for housing by 10-20%, and be followed by a residential housing price reduction of 5-20%.
An analysis shows that the investors' risk is equivalent to purchasing a "physical" apartment. As for the government, the risks are hedged by the huge amount of land owned by the government.
- TOC works successfully in analyzing and resolving an important macro-economic problem.
- The thinking processes and the 7 focusing steps are very effective even in the real estate financing environment.
- A win-win solution of issuing "real estate bonds" can resolve the conflict that causes high residential housing prices.
2. Questions attendees might ask
- What is the private investors' interest in buying the bonds, assuming prices will drop?
- What is the government interest in issuing the bonds, assuming prices will go up?
- What are the implications of identifying the main constraint as available residential housing lands?