Housing policy out of sync with shifting demand, especially for smaller homes, study finds

Research center says failure to account for growth of number of households driving prices out of reach, leaving more families in rentals, with major changes needed to address crisis

Israel’s housing crisis is being driven by a massive gap between skyrocketing apartment prices and lagging household incomes, according to a study released Wednesday by the Shoresh Institution for Socioeconomic Research.

While apartment prices in Israel surged by approximately 130 percent between 2000 and 2022, net household income rose by only 45% during the period, the report found. The rise in average rental prices was more in line with wage increases, rising by 40% during this time.

The study, authored by researcher Yael Mishli, found that home prices are being driven upward by a persisting shortfall in the supply of homes, with the crisis aggravated by construction failing to match a demographic shift in which household numbers have outstripped population growth, pointing to unmet demand for smaller units.

Calling this a “deep structural failure,” the study called for major policy changes to right a housing market long plagued by low supply, a problem primarily driven by a centralized, fragmented planning system and burdensome licensing requirements that result in years of administrative delays, according to the report.

The Housing Ministry did not reply to a request for comment.

With ballooning prices putting home ownership out of reach, many are continuing to rent homes into middle age, though in the past, this was seen as mainly a temporary measure for young people. While in 2001, only 10% of five-person households lived in rentals, by 2022 that share had risen to 20%, a trend seen across nearly all household sizes and age groups.

Though rental prices have risen less sharply than home costs, paying rent still constitutes a major financial burden for many families. According to the report, approximately 54% of households in Israel’s bottom income quintile now spend more than 40% of their disposable income on rent — one of the highest rates among OECD nations.

The report identified what it said were structural issues regarding the pace and type of new construction driving problems across the housing market, including a failure to account for the rise of smaller households.

Since the early 1970s, the number of Israeli households has grown by 350%, outpacing the 290% increase in overall population growth, largely due to smaller household sizes, retirees living longer and remaining independent, and an increase in unmarried adults, according to the study.

“The implication is that the number of required apartments has grown faster than the population,” the report noted.

However, construction numbers have more closely matched population growth than household growth: Between 1990 and 2023, the number of households grew by more than 1.7 million, but construction began on only 1.6 million apartments. This has created a gap of approximately 121,283 homes in the market. When measuring completed apartments, the deficit widens to 272,141 units.

Israel will need about 65,000 new housing units annually between 2026 and 2030, rising to about 73,600 units annually by 2040 to 2045, according to estimates by the National Economic Council. However, since 2020, average annual housing starts have been about 63,500 units, below projected demand.

The year 2025 saw a temporary increase to 74,300 starts, but this is not representative of long-term trends, the report said, without specifying a reason.

Though households are becoming smaller, developers building new homes tend to focus on larger units, which command higher prices and carry better profit margins. Between 2001 and 2022, the share of one- and two-person households increased by about 5% to over 45% of all households, but the share of studio, one- and two-bedroom units only began to rise in recent years and is still only about one-fifth of new starts.

“The construction mix still does not correspond to the structure of households in Israel,” the report said.

Ayal Kimhi, vice president of the Shoresh Institution, warned that the current trajectory is unsustainable without a fundamental shift in government strategy.

“The housing crisis in Israel is not only a construction crisis. It is a policy crisis,” he said. “The government plans residential construction, but not the apartments people need, not at the pace required, and not within a comprehensive policy for the rental market and long-term housing.”

Without changes from planning authorities, Kimhi warned, the crisis will become a “permanent structural problem” for the Israeli economy.