Israel has higher cost of living than wealthier European nations, study shows

Sharp rises in food and housing prices in the past two decades are the main factors, fueling the ever-rising cost of living in Israel, the Aaron Institute for Economic Policy finds

Soaring housing costs and steep food prices are the main drivers behind Israel’s high cost of living, which has overtaken even some of the wealthiest countries in Europe, according to a study by Reichman University’s Aaron Institute for Economic Policy.

“The cost of living in Israel is very expensive, and when you add the security situation and almost three years of war, it is not surprising that we are starting to see signs of emigration of quality human capital – meaning that more Israelis are leaving the country than are coming back,” Dr. Sarit Menahem-Carmi, a senior researcher at the Aaron Institute for Economic Policy at Reichman University told The Times of Israel. “If nothing changes and affordability continues to decline, this is a catalyst for emigration.”

The study, led by Menahem-Carmi, found that the cost of living in Israel has surged over the past two decades and has become more expensive even when compared with some of the wealthiest countries in Europe – Austria, Finland, Denmark, the Netherlands, and Sweden – where GDP per capita is higher.

The research showed that the average household consumption basket (including food, housing, electricity, health, and education) in Israel is 21 percent more expensive than in the richest countries in Europe. In comparison to countries where GDP per capita is lower – Greece, Cyprus, Italy, and Spain – the cost of living in Israel, as measured by the average consumption basket, was found to be 68% more expensive.

The study is based on data from the Central Bureau of Statistics and the Organization for Economic Co-operation and Development.

A comparison of the cost of living in developed countries by the OECD lists Israel as the fourth most expensive place to live. The burgeoning cost of living has long been a flashpoint, culminating in massive protests in 2011 that saw hundreds of thousands camp out in city streets throughout the country, demanding that the government take action to make household expenses, such as food and housing, more affordable.

“The issue of tackling the cost of living has been on the table of decision-makers for more than a decade, and not only has there been no improvement, but Israel is becoming more and more expensive because structural import and other regulatory barriers are not removed, while the population keeps on growing,” said Menahem-Carmi. “Addressing the cost of living effectively is complex and requires policymakers to be determined and persistent, but the ability of the government to execute has been very low.”

An analysis of the consumer basket of average Israeli households identified ever-rising housing and food prices as the main components fueling the country’s high cost of living, said Menahem-Carmi.

That was not always the case. In 2005, housing prices in Israel were 31% lower than in the wealthy countries surveyed in the study, while today they are 26% higher, according to the study. Housing prices in Israel are 85% higher than in countries with a lower GDP per capita, such as Greece, Cyprus, and Spain.

Successive Israeli governments have for years promised to lower ever-climbing housing prices nationwide. The sky-high costs have put home ownership out of reach for many Israelis.

When it comes to food prices, costs in Israel in 2005 were 26% lower than in the group of wealthy countries surveyed in the study, while today they are 27% higher.

The study also found that during the last two decades, the cost of fruits and vegetables has risen by 86%, while milk and dairy products, including cheese, increased by 47%.

“The main reason for the rise in prices of agricultural produce in Israel is the nature of the support of farmers,” said Menahem-Carmi. “Unlike the overwhelming majority of developed countries, which support agricultural production via direct subsidies, support in Israel is provided indirectly through a price mechanism, by restricting imports of fresh produce and imposing customs duties, which limit competition and lead to price increases.”

In the dairy sector, competition is curtailed as the market is governed by centralized planning and a state-approved quota system. The government controls the volume and sets the price of raw milk that farmers sell to dairy producers. A controversial dairy reform plan, advanced by Finance Minister Bezalel Smotrich, to abolish tariffs and flood the Israeli market with imported dairy products, was pulled last month amid political pressure and fierce opposition from farmers.

“The import restrictions and stringent regulations coincide with rapidly growing demand, driven by Israel’s fast population growth and a rising standard of living,” said Menahem-Carmi.

From 2000 to 2024, local production of fruit and vegetables grew by only 10%, while Israel’s population grew by 52%.

To tackle the high cost of living in Israel, the Aaron Institute recommends policymakers remove structural barriers to increase competition by abolishing the milk quota system, lowering import barriers, gradually reducing tariffs, and cutting excessive regulation and bureaucracy.

“The regulatory procedure for imports into Israel is strict, lengthy, and expensive, especially for food and toiletries – a process that excludes small players and strengthens the large ones,” said Menahem-Carmi.

In the housing market, the government needs to create incentives for local authorities to approve residential building permits, the study recommended. In addition, residential construction needs to be planned around public transportation.

“The solutions exist and can be executed, but only if the government commits to a coordinated approach involving all necessary ministries,” said Menahem-Carmi. “Addressing the cost of living does not involve the need for large budgets and will significantly improve the standard of living in Israel.”