Housing Market in Palestine: Supply, Demand and Prices

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MAS is dedicated to producing sound and innovative policy research, relevant to economic and social ... housing attributes on the annual rent for renters or on annual estimated ... In comparison with the room- demand model, owner own price.
Palestine Economic Policy Research Institute

Housing Market in Palestine: Supply, Demand and Prices

Omar Abdel Razeq

2015

The Palestine Economic Policy Research Institute (MAS) Founded in Jerusalem in 1994 as an independent, non-profit institution to contribute to the policy-making process by conducting economic and social policy research. MAS is governed by a Board of Trustees consisting of prominent academics, businessmen and distinguished personalities from Palestine and the Arab Countries.

Mission MAS is dedicated to producing sound and innovative policy research, relevant to economic and social development in Palestine, with the aim of assisting policy-makers and fostering public participation in the formulation of economic and social policies.

Strategic Objectives      

Promoting knowledge-based policy formulation by conducting economic and social policy research in accordance with the expressed priorities and needs of decision-makers. Evaluating economic and social policies and their impact at different levels for correction and review of existing policies. Providing a forum for free, open and democratic public debate among all stakeholders on the socio-economic policy-making process. Disseminating up-to-date socio-economic information and research results. Providing technical support and expert advice to PNA bodies, the private sector, and NGOs to enhance their engagement and participation in policy formulation. Strengthening economic and social policy research capabilities and resources in Palestine.

Board of Trustees Samir Hulileh (Chairman), Ghassan Khatib (Deputy Chairman), Magda Salem (Treasurer), Luay Shabaneh (Secretary), Ismail El-Zabri, Jawad Naji, Jihad Al Wazir, Lana Abu Hijleh, Sabri Saidam, Nafez Husseini, Khaled Osaily, Mohammad Nasr, Bassim S. Khoury, Nabeel Kassis (Director General of the Institute - ex officio member)

Copyright © 2015 Palestine Economic Policy Research Institute (MAS) P.O. Box 19111, Jerusalem and P.O. Box 2426, Ramallah Tel: ++972-2-2987053/4, Fax: ++972-2-2987055, e-mail: [email protected] Web Site: www.mas.ps

Palestine Economic Policy Research Institute

Housing Market in Palestine: Supply, Demand and Prices

Omar Abdel Razeq

2015

Housing Market in Palestine: Supply, Demand and Prices Senior Researcher: Research Assistant: Statistical Analyst:

Omar Abdel Razeq Habib Hinn Nael Mousa

This study was funded by The Arab Fund for Economic and Social Development

Palestine Economic Policy Research Institute (MAS) Jerusalem and Ramallah

ISBN 978-9950-374-52-2

Foreword The Palestine Economic Policy Research Institute (MAS) launched in 2014 a research project on “Housing and Building in the Occupied Palestinian Territory: The Evaluation of Past Experience and Formulation of a Vision for the Future”. We at MAS are truly pleased to have received the necessary support from the Arab Fund for Economic & Social Development in order to implement this project. This has enabled our research team to embark on a series of studies and to complete and publish them successively. The current technical, in-depth study addresses supply, demand, and prices within the housing market in Palestine; analyzes the market’s various aspects, setting out from the attributes of the housing units and their dwellers, whether owners or tenants; and uses mathematical models to estimate elasticity and effective demand, as well as potential demand and the indicators for affordable housing. This study comes at a time when the interest in the building and housing sector is rising, since the sector is seen as a mainstay of the Palestinian economy. I hope that the conclusions and recommendations of this study will help all stakeholders, whether decision-makers, developers, non-profit housing cooperatives, and even individuals, to pursue an approach that responds to the increasing demand for housing in the short, medium, and long runs. On behalf of MAS, I would like to extend our sincere thanks to the Arab Fund for Economic & Social Development for its continued support to the Institute and for funding this study.

Nabeel Kassis, Ph.D. Director General

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Executive Summary 



The study aims to analyze the various aspects of the Palestinian housing market. It starts with a descriptive presentation of the characteristics of housing units and the families residing in them as owners or renters. Then, regression models (a total of 48 models) are used to estimate the various elasticities and other characteristics of effective demand for the year 2012. Then, gap analysis is used to estimate potential demand and supply and thus the expected gap in the housing market for the period 2013 – 2025. Affordability indicators are calculated for the year 2014. Finally, recommendations are made based on the carried analysis. The main data was made available by the PCBS including a non-published cross sectional survey of the housing conditions in the Palestinian Territories for the year 2012. Other data sources were used and some data was collected by the research team at MAS. To analyze effective demand, Hedonic Regressions were used. They are composed of two stages: the first estimates the effects of various housing attributes on the annual rent for renters or on annual estimated rental value for owners. The second stage uses the results of the first to estimate demand functions for the housing units.

The main results for the second stage can be summarized as: Housing Demand Functions for Renters: Available data allowed for the estimation of demand equations for renters for the variables: the area of the housing unit, its age and the period of time spent in it. The main results for the demand equation of the housing unit area (all regions except center West Bank)1: 



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The estimated demand price and income elasticities for renters (also for owners) are in line with the results of international research that studied housing markets in developing countries. Rental demand price elasticities (in absolute values) for renters in all regions are less than 1, housing demand for renters is in elastic. The highest price elasticity is in GS (0.78), the lowest is found in the NWB (0.12). A rise in the price of a squared meter (its annual rent) of the housing unit by 10% will reduce the area demanded by 7.8% in GS, The cross sectional survey allowed analysis for the Palestinian Territories (PT) as a whole, West Bank (WB), Gaza Strip (GS), North West Bank (NWB), Center West Bank (CWB) and South West Bank (SWB),(PCBS, 2012).

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1.5% in WB, 1.7% in SWB and 1.2% in NWB. Rental housing units is a necessary “good” with almost no substitutes. Rental demand income elasticities are positive and low (less than 0.2 for all regions2). A rise in household income by 10% increases the demand for rental area by 1.33% in WB, 1.9% in SWB and by less than 1% in PT and NWB. Other variables affect the demand for rental housing area including average age of household members, the length of period stayed in the housing unit, whether the housing unit is an apartment in a building or a separate home, and the distance between the housing unit and health care and cultural institutions.

Owners’ Demand Functions for Housing Attributes  Available data made it possible for us to estimate the owner demand equations for three variables: number of rooms in the housing unit, area of the housing unit, and the age of the housing unit. The main results for the area-demand model are:  Owner demand is price inelastic. The highest price elasticity is in GS (0.973) while the lowest is in SWB (0.737). A rise in the price of the squared meter of the owned housing unit by 10% reduces the area demanded by 9.73% in GS, 8.83% in PT, 8% in WB, 7.6% in NWB and 7.4% in SWB.  In comparison with renters, owner own price elasticity is much higher. While the owner demand price elasticity in GS is higher than the renter one by only 25%, it is in NWB 6.5 folds its value for renters. Owner price elasticity is also 5.3 folds its value for renters in WB, 4.4 folds its value for renters in SWB. The decision to buy a housing unit is to commit a large portion of family income and wealth. Moreover, buying a housing unit can take much longer time than the renting decision.  In comparison with the room- demand model, owner own price elasticity in the area model is 3.3 fold its value in the room model in PT, 2.35 folds its value in WB. This is expected for two reasons: first rooms comes in limited whole numbers (integers), while the area comes in a wide range of values and varies in fractions of meters. Second, the number of rooms is specific to the interior of the housing unit and is difficult to change once the unit is built.  Owner demand income elasticities in both the room and the area model are equivalent. Since, income wise, buying an area is exactly the same as buying the rooms inside. Income elasticities are very low 2

The coefficient for GS is insignificant.

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but positive (no more than 0.14 in all regions), housing is a necessity for owners. There is a need for a big jump in income for the family to decide to buy a house! Income elasticities for owners are lower than for renters by 26% in SWB, 18% in both WB and NWB and by 8.6% in PT. Owning a house is a much more important decision than renting one. Expenditure Functions (Engle Relations) for Renters:  No version of the models applied to NWB.  Expenditure rental income elasticities (which are equal to demand income elasticities) are all small, positive and significant. The highest income elasticity for renters in this model is in CWB (0.332) while the lowest is in GS (0.08). In comparison with the Hedonic results, expenditure income elasticities are clearly higher (by 264% in PT and by 18% in WB).  Expenditure price elasticity is significant only in WB, GS, and SWB. All are positive which means that demand is inelastic. Its value in GS (0.267) is less than a third of its value in WB (0.843). A rise in the price by 10% reduces expenditures on rental area in the WB by 8.43% and the quantity of area demanded by 1.57%. In GS the reduction would be by 2.67% in expenditures on rental area and by 7.33% in demanded rental area.  The effect of the number of members in the family on rental area demanded was positive (as expected) except in GS where the sign is negative but insignificant and very small!  The effect of the squared value of the number of family members was negative (very small) meaning that there is a crowding out effect of family size. More mouths to feed means less will be available for rental area. Expenditure Functions (Engle Relations) for Owners:  Income expenditure elasticities (equal to demand income elasticities) are all positive (as expected), small and significant. The highest value is in CWB (0.148) and the lowest is in GS (0.07).The elasticities in this model are higher than those in the Hedonic model in all regions.  The significance level for the room price expenditure elasticity is extremely high (close to 100%) in all regions. All are positive, meaning that demand is inelastic. Highest room price expenditure elasticity is in CWB (0.83), while the lowest is in WB (0.74).Thus demand price elasticities (rooms) is (-0.17) in CWB and (-0.26) in WB (equals 1 minus expenditure price elasticity).

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Area price expenditure elasticities have high significance levels in all regions (except in GS). All are positive; thus demand is inelastic. The area price demand elasticity is (-0.895) in PT and (-0.827) in WB. The effect of family size is positive (as expected) in all regions (it is insignificant in SWB). Crowding out effect of family size exists in all regions (insignificant in CWB and SWB).

Potential Demand for Housing in PT Potential housing demand represents the need for housing depending on social and demographic developments, in addition to the need for improving housing conditions (reducing density), the need for replacing the unfit units and the needed vacancy levels: 

  



 

Demographic changes are summarized by population growth and changes in family size. The PCBS publishes its forecasts regarding these indicators. To improve housing conditions, it is assumed that the density problem will be resolved over a period of 10 years. The unfit housing units is estimated using the results of the 2007 census; 1.024% for the WB and 0.43% for GS. As for vacancy rates, the 2007 census estimates them at about 16% for the WB and about 10% for GS which are expected to be over estimations due to the changes in the migration habits of Palestinians. Thus, another case is analyzed assuming a fixed vacancy rate at 4% in both regions. The results show that total potential demand for housing in each of the WB and GS increases over the years (2013 – 2025). The annual average of potential demand is expected to be about 33.3 thousand units and 20.2 thousand units in WB and GS respectively. Average annual growth rate in potential demand is 2.19% and 3.27% in WB and GS respectively. When the 4% vacancy rate is assumed, annual averages decline to 29.3 thousands and 18.7 thousands in WB and GS respectively.

Estimated Supply of Housing units for the Period 2013 - 2025  Two scenarios are taken into account; an optimistic one where the newly licensed housing units in the WB will continue growing at the average rate of 2008 – 2013 (15.6% annually), and in GS will grow at 24% (rate for 2013) for a period of time until the ratio of total newly licensed units in GS to that in the WB reaches 28% (their ratio in

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‘normal times’). This occurs in 2020; after that growth rate in both regions is estimated to be equal, i.e. the ration stays constant. The second scenario is pessimistic, assuming continued blockade on GS even with the existence of the reconciliation government. In this case, newly licensed housing units in GS will grow at a rate of 8.6% annually (its average growth rate during 2011 – 2013).

Market Gap  The estimated excess demand (market shortage) in the WB declines from about 16850 units in 2013 to about 3730 units in 2019. Then a surplus of 340 units appears in the WB in 2020 and rises to about 39100 units in 2025. In GS, in the optimistic case, the shortage increases from 14600 units in 2013 to a little less than 14800 units in 2015, then it declines continuously reaching about 2800 units in 2025. However, in the pessimistic case, the shortage rises to about 18900 units in 2025.  Assuming a vacancy rate of 4% reduces the shortage in 2013 by 17% and 7% in the WB and GS respectively. The surplus in the WB rises in 2025 by 14%. In GS, in the optimistic case, the shortage falls extensively to reach only 625 units in 2025 (only 22% of its level when vacancy rates are those of 2007). In the pessimistic case, the shortage in GS reaches 16700 units in 2025 (88% of its level when the vacancy rates are those of 2007). Affordability Analysis in the PT 2014 Using prices and areas of housing units collected from classified ads and net sites, and the conditions for mortgage financing in the PT (15% down payment for 25 years) and using 5% as annual interest rate, we have the following results: 



Assuming per-capita GDP (about $2000 in WB and $1500 in GS) and assuming an average family size of 5.5 and 6 members in WB and GS respectively, and using a threshold of 30% for DFR (debt financing ratio), an average Palestinian family will not be able to buy a housing unit (area of 140 sqm) in any of the regions except in low valued neighborhoods of Nablus, GS and Salfit. If the DFR was raised to 40%, the average family choices will be expanded to be able to finance a unit in average Nablus, low valued neighborhoods in Hebron and Ramallah. The minimum necessary family income to be able to finance a housing unit of an area of 140 sqm, using the 40% threshold level must be no

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less than $952 per month and $1450 in average and high valued neighborhoods in GS. In average Ramallah neighborhoods, the minimum monthly family income must be at least $1229. Recommendations: Distinguishing and freeing the rental housing market to be separate from that for ownership through making units of characteristics more suitable for rent by newly formed families. These families usually rent for few years and then build or purchase their own housing unit. This can be achieved through:



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Developing the legal environment to encourage investment in rental housing, including developing the rental laws. Adopting a national housing strategy where the Government supplies rental housing with characteristics that reduces investment costs and thus rents. This must be done with strong commitment to the safety, engineering and environmental standards that should be specified in a special law. The study makes clear that rental units need not be larger than 100 sqm with 3 rooms and 2 baths and a relatively small kitchen. They should be built with cement blocks where possible. The study proved that cost and price aspects are most important, thus policies that reduce cost are expected to be more effective: Land is a major cost item, thus policies that reduce its cost will have weighted effects on the total cos and thus the prices of housing units:  Expand residential zones of communities wherever possible and allowed by the Israelis. This should be done within an approved local housing strategy.  Developing laws, instructions and bylaws regarding zoning and building conditions: • Increase the building area to land ratios where possible. • Allow higher buildings.  Adopting a national strategy for the use of Waqf land in special government housing projects made for the benefit of special social groups or for developers with strict regulations regarding conditions and pricing. It is possible to reduce building costs through preferential treatment for national production of raw materials. People reduce costs by managing the building process of their homes. This aspect can be used in the housing programs targeting

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special groups. They should be allowed to work in and manage the process to cut their cost. The present conditions for mortgage financing benefits a limited portion of Palestinians. It is recommended here that a special mortgage program be devised to accommodate the affordability of special groups: - Set a maximum area for the housing unit to qualify for the program (example 120 sqm). Specify certain cost-reducing characteristics; for example cement blocks, 2 baths, a medium kitchen …etc. - Reduce the interest rate, increase the maximum time span for the mortgage and reduce the down payment. - Encourage Islamic mortgage financing to remove religious restrictions. - Launch informative programs about mortgage financing and its benefits over regular financing. For private sector investors, they can use the results of the study to provide suitable housing for a wider range of people. There is a need for more detailed data to be produced by the PCBS on narrower geographical levels. This will allow analysis on the district or urban or rural or certain localities.

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