The construction of thousands of affordable housing units has been postponed due to a lack of funding

The government has not yet approved a special budget for Litzman’s affordable housing program, the implementation of which only began recently. Tenders for the construction of 1,800 apartments have already been postponed, and if no solution is found, the building of a total of 11,000 apartments will be postponed. The Director-General of the Ministry of Housing warns of a severe shortage of supply in the market that will ultimately lead to a further increase in prices.

MK Yaakov Litzman’s plan to build tens of thousands of affordable housing units for non-homeowners ran into trouble this week, postponing the construction tenders for 1,800 discounted apartments. The Minister of Housing and Construction’s plan is at risk due to a lack of budget for the continued implementation of the program.

In a recent letter sent by the Director-General of the Ministry of Housing and Construction, Yair Pines, to the Government Secretary of the Prime Minister’s Office, Tzachi Braverman, Pines warned that if the budget for the plan is not approved, tenders for 11,000 affordable housing units will be delayed.

The affordable housing tenders that were supposed to close last week include those for construction in Ashkelon (100 apartments), Afula (300 apartments), Dimona (840 apartments), and the ultra-Orthodox city of Rechasim (600 apartments). If the issue is not resolved, a similar fate awaits tenders for building in Ofakim, Eilat, Tiberias, Acre, Safed, Emanuel, Ma’alot Tarshiha, Sderot, Ma’ale Ephraim, and more – a total of more than 11,000 apartments.

In order to continue to implement MK Litzman’s affordable housing program, the government needed to allocate a special budget. This never happened because the government did not approve a budget at all for 2021, and will not do so until after the March elections – assuming that the parties manage to successfully form a government.

Danger of a housing shortage and rising prices

In a letter sent by Pines at the end of January, he wrote that “there is a urgent need to put the proposal of the Ministry of Housing and Construction on the government agenda. They must immediately come to a decision about grants and development subsidies for the ‘Housing at a Reduced Price’ government housing program for tenders in the periphery. The failure to submit the proposal for government approval will directly harm the supply of housing units.”

Pines also warned that delaying the transfer of the budget would accelerate the current trends of dropping supply and rising prices in the Israel real estate market. “The critical need to approve the proposal for grants and development subsidies relies on long-term data indicating a decline in marketing and construction starts and an increase in the annual gap between housing supply and demographic growth. These trends exist in the context of three election campaigns, which did not allow for significant decision-making, and the Covid pandemic, which exacerbated the challenges in the industry and diverted the housing market from the public agenda.”

“Recently published reports from the Central Bureau of Statistics show that we are already seeing consequences in the real estate market, in the form of rising housing prices. The outcomes of recent construction tenders indicate that prices will continue to rise in the future. As long as no immediate action is taken to support the construction industry, including increasing marketing in the periphery, this trend will only get worse. We may face housing shortages and rising prices that will severely impact Israel’s citizens.”

How does the new affordable housing plan work?

Litzman’s “Housing at a Reduced Price” program (diur b’mechir mufchat) replaced former Finance Minister Moshe Kahlon’s “Buyer’s Price” program (mechir l’mishtaken), which ran from 2015 to early 2020. The plan was approved last September by the Israel Lands Council but only started in December, after receiving approval from Finance Minister Israel Katz.

While the Buyer’s Price program operated in the same way throughout the country, Litzman’s plan for affordable housing is supposed to work differently depending on the demand in the region. In high demand areas where the price per square meter of construction is high, such as Tel Aviv, Herzliya and Ramat Hasharon, the State will market the plots using a “multi-price method,” as was customary before the Buyer’s Price program.

In other areas, there will be two types of subsidized tenders. In the first type, the State will determine the final price of the apartments – a discount compared to the market price – and construction companies will offer bids for the purchase of the land, where the highest bid wins. In the second type of tender, intended mainly for the remote regions in the periphery, the State will determine both the price of the land and the apartments in advance, and construction companies will compete with each other to pay for the rights to develop the land.

So far, tenders have been successfully executed for the construction of several thousand apartments, including in cities located in areas of demand such as Ramat Gan, Rishon LeZion, and Bnei Brak. However, without an allocated budget uncertainty is growing regarding the continued implementation of the affordable housing program.

The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.