Sunday, October 30, 2011

Israelis Protest Against...The Laws of Supply and Demand

In spite of Israel's booming economy and low unemployment rate, widespread economic protests erupted across Israel. One central theme in these protests, is the rising cost of living, particularly in the housing sector. While I sympathize with anyone who must deal with the pressure of high housing costs, a brief analysis of Israel's housing market shows that rising prices are driven have largely been a product of supply and demand:

1. Between 1990 to 2011, Israel's population grew by 60% (from 4.68 million to 7.80 million), which translates into a huge increase in demand for housing.

2. To begin with, Israel is not a large country, but with desert covering 55% of Israel's landmass, the population is largely concentrated into a thin coastal strip, available land for housing is limited.

3.For economic and cultural reasons, most Israeli's eschew development towns and are drawn towards the vibrant area of Metropolitan Tel Aviv. And Israel's religious population is by and large drawn towards the city of Jerusalem. This has further exacerbated the rise in the cost of housing in the aforementioned areas.

4. Israel's withdrawal from the Gaza Strip and the stream of refugees that it generated, simultaneously decreased the supply of and demand for housing.

5. The government, via the Israel Land Administration, controls 93% of the land and has a notoriously heavy handed regimen of licenses and permits, which surely has limited the ability of Israeli developers to meet the ever rising demand.

6. And of course, rising wages among large sectors of Israeli society have further increased the demand for housing. And I suspect that has encouraged speculative investment, which has also contributed to the said phenomena.

7. The only legitimate complain of the protesters is that the government spends a disproportionate amount of its housing budget on the settlements in Judea and Samariah (the West Bank).

In spite of the tremendous benefits that market liberalization has brought to Israel, most of the protesters envision even greater subsidies and price controls as the solution to their dilemma, which 93% of American Economists agree is a terrible idea. The socialist economist Assar Lindbeck  went as far as stating "In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing." Sorry khaverim (friends in Hebrew), you can protest all you want, but you cannot overturn the laws of supply and demand.

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