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The Changes In Rent In Israel During The Years Of The Housing Crisis 2008–2015

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  • Ofer Raz-Dror

    (Tel Aviv University)

Abstract

In this study, I describe an anomaly I have found in the rental market in Israel: two key figures published by the Central Bureau of Statistics (CBS) regarding changes in rental prices are inconsistent. The first figure—Average Rental Prices—determines that rental prices increased by 59% in nominal terms in the years 2008–15, while the second figure—the allegedly more reliable Rental Price Index—determines that rental prices increased by only 34%. In the article, I examined the usual explanations for possible bias in measurement, and found that they could not explain the anomaly. Therefore, I present an alternative explanation for the sharp downward bias of the accepted index, which stems from different changes in prices for new tenants vis-à-vis existing tenants, and from the manner of monitoring the tenants surveyed in the index. I show that the CBS method of measurement does not include observations of new tenants, where the price increases are the highest. I then propose a correction to the measurement using the hedonic methodology, based on the source data. The research shows in the years 2008–15, rental prices increased by 60% in nominal terms and by 50% in real terms; an increase twice as high as previously estimated. This finding indicates that the Consumer Price Index (CPI) is biased downward and that the probability of a price bubble in the Israeli housing market is significantly lower than estimated. In addition, this finding changes the perception regarding the reasons for the increase in housing prices between 2008 and 2015, from a rise based on an increase in the demand for investment in housing to a rise resulting from an increase in the demand for housing. Therefore, this finding makes an important contribution to our understanding of the sources of the price increases in the market and its nature and makes it possible to create relevant remedies to the situation in the housing market. Rental prices are the best barometer for estimating the difficulties of expanding supply, since they are not directly and widely affected by changes in individuals' expectations and in the interest rate. Therefore, if rental prices increased more than estimated, dealing with the supply problem is more central to solving the housing crisis.

Suggested Citation

  • Ofer Raz-Dror, 2019. "The Changes In Rent In Israel During The Years Of The Housing Crisis 2008–2015," Israel Economic Review, Bank of Israel, vol. 17(1), pages 73-116.
    • Handle: RePEc:boi:isrerv:v:17:y:2019:i:1:p:73-116
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    References listed on IDEAS

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    Cited by:

    1. Yossi Yakhin & Inon Gamrasni, 2021. "The Housing Market in Israel: Long-Run Equilibrium and Short-Run Dynamics," Bank of Israel Working Papers 2021.08, Bank of Israel.
    2. Jonathan Preminger & Assaf S. Bondy, 2023. "Conflicting Imperatives? Ethnonationalism and Neoliberalism in Industrial Relations," ILR Review, Cornell University, ILR School, vol. 76(4), pages 646-673, August.
    3. Gal Amedi, 2023. "The Determinants of the Transit Accessibility Premium," Bank of Israel Working Papers 2023.12, Bank of Israel.
    4. Alex Ilek & Nimrod Cohen & Yaakov Chen-Zion, 2024. "Assessing the Impact of Monetary and Macroprudential Policies on Israel's Housing Market: A DSGE Model Approach," Bank of Israel Working Papers 2024.14, Bank of Israel.

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