Is Israel’s notorious cost of living really that high?

Israel, a nation renowned for its vibrant culture and technological advancements, is grappling with an issue that has left many of its citizens concerned – the high cost of living. Rising prices in housing, childcare, and several other essentials have placed a heavy burden on the wallets of Israelis, prompting widespread discussion of the challenges faced by individuals and families across the country.

One of the oft-criticized aspects of Israel’s cost of living discussion is how poorly it seems to do when compared to that of other nations – but as it turns out, overall Israel is doing pretty well compared to other countries in terms of inflation and purchasing power.

Unlike the common perception, inflation in Israel over the past decade was more moderate than the international Organisation for Economic Co-operation and Development (OECD) average, while the increase in household income, at all levels, was much higher. This made possible a real increase in purchasing power and an improved standard of living.

That’s not to say that some things aren’t more expensive here than they are elsewhere. Prices in Israel for some products and necessities were high 10 years ago and remain high today – and the purchasing power of Israeli workers is relatively lower than the OECD average and has been for a while.

As well, there is a significant wage gap between Israel’s hi-tech sector and practically every other area of its economy, which has exacerbated the economy’s current woes.

So, what’s the big idea then? Is Israel’s cost of living really so high compared to other countries? How does Israel measure up to those countries, and what’s the right metric to measure by? And what are the industries that are driving up the little country’s steepening cost of living?

Real estate

First and foremost among Israel’s pricier commodities is real estate. Prices for both renters and buyers have climbed consistently over recent months.

In January-February 2023, there were various changes in home prices across different regions in Israel. The average housing price in the first three months of 2023 showed a significant increase compared to the corresponding quarter of 2022. Central Bureau of Statistics data indicate that prices have climbed by nearly 10%. Specifically, the average price for an apartment rose from NIS 1.8 million ($486,000) at the beginning of 2022 to NIS 1.96 million ($530,000) in the first quarter of 2023.

Recently, real estate prices have begun to stabilize. But according to Dan Ben-Shahar, director of the Alrov Institute for Real Estate Research at Tel Aviv University’s Coller School of Management, that’s not necessarily amazing news for those hoping to buy any time soon.

“The interest rate has changed dramatically over the course of more than a year now, so what we now see is a tragic situation for new home buyers: Even though real estate prices have stabilized, they’ve stabilized at a very high level,” he explained. “Now we see interest rates coming up, too. This combination leaves many potential new homeowners sitting on the fence.”

Childcare

Childcare expenses have emerged as a major concern for families across Israel, with the rising cost of early childhood education and daycare services placing a significant burden on parents.

According to recent statistics, childcare can cost around 30% of the average adult salary – a figure that tracks fairly evenly throughout the country.

Recently, the government attempted to assuage the concerns of overpaying parents by promising a plan for free childcare until the age of three – beginning in January. However, due to a bevy of caveats, that plan will ultimately only provide reduced costs to approximately 25% of children in public daycare systems.

The main issue driving high daycare costs is a severe lack of manpower – an issue that plagues the entire education industry. 

At the end of July 2022, the Education Ministry announced that Israel faces a shortage of almost 6,000 teachers. In conjunction, the few teachers Israel does have are sorely underpaid, a point which has been at the core of several strikes held by the Teachers’ Union in past years.

During the most recent tension between the government and the Teachers’ Union, Finance Ministry representative Kobi Bar-Nathan acknowledged the importance of taking action to ensure that teachers will have suitable wages, thereby ensuring that more people will become teachers.

“A great responsibility rests on our shoulders as those responsible for the public treasury, and we must make sure that the use of public funds will make the education system the best it can be,” he said.

We’re still waiting for that to happen, though.

Food

Due to Israel’s dependence on imported food items, combined with its complicated regulation system and limited market competition, food is fairly expensive.

According to a study from the Shoresh Institute, Israelis can purchase more fruits and vegetables than the OECD average, but in all other categories – fish, oils and fats, meat, beverages, bread and cereals, and eggs and dairy – they pay significantly more than average.

Because of that, Israel faces a continuous struggle with food security. According to Leket Israel’s Food Waste and Rescue Report, published in November, food security is an issue that affects 16.2% of households throughout Israel, largely due to Israel’s unfortunate OECD-leading 19.8% poverty rate.

There are several organizations working to combat this situation by rescuing food, collecting donations in order to redistribute food to those in need, or – in the case of Colel Chabad – offering a place to shop that won’t require exorbitant spending just to ensure a viable calorie count.

Colel Chabad is in the process of launching a series of stores that sell quality off-brand foods and groceries for customers with tighter budgets. According to Colel Chabad’s Rabbi Mendy Blau, avoiding name brands is a key way to curtail overspending on already expensive food.

“The main issue in Israel is that 50% or even more of the products being sold are owned by five companies, which run everything. Most of the things that you’re going to see on the shelves are two brand names,” he said, going on to note that a huge part of the lack of market competition is due to the highly restrictive import laws, which prevent smaller off-brands from entering the market without a major bureaucratic headache.

Car insurance

When contemplating the industries that are pushing up Israel’s cost of living, the price of car insurance policies has also become a significant driver.

According to the Wobi insurance price comparison website, car insurance rates in Israel, particularly comprehensive coverage that includes damage and theft, have increased by an average of 30% in the past year. This rise is significantly higher than the annual inflation rate of 5%. As well, compulsory insurance rates for injury, regulated by the government, have also risen by 10% over the past year, surpassing the inflation rate.

The primary reason for this increase is attributed to a significant surge in car theft, which is costing insurance companies around NIS 1.3 billion a year, or over NIS 100 million per month. Pointer Telocation, a company offering vehicle location solutions, reports a staggering 140% increase in cars stolen during the first three months of 2023, compared to the same period last year. Additionally, lockdowns in China, supply chain issues, and the depreciation of the shekel have all contributed to higher prices for spare car parts, which has further increased policy prices.

Everything else

These are only a few of the categories in which Israelis pay more than other nations. Also worth noting are its high prices in health, recreation, education, restaurants, hotels, and resources such as water, electricity, and gas.

Is Israel pricier than other countries?

According to a recent study conducted by the Israel Democracy Institute (IDI), Israel has seen a recent rise in its overall relative purchasing power as compared to other OECD nations. Between January 2011 and June 2022, the average OECD country’s consumer price index rose by 31%, while Israel’s rose only by 10%, indicating a somewhat sharp increase in overall purchasing power for the Start-up Nation.

An examination of the Consumer Price Index components in Israel over the past 10 years reveals, generally, that the prices of tradable goods such as clothing and footwear, housewares, gas, and electricity experienced only moderate increases or decreases over the decade. Non-tradable goods and services exhibited greater variability, with notable price hikes observed in restaurants, cafes, hotels, education, and housing. Communication services, culture and recreation, and transportation experienced price reductions

However, the IDI’s findings act as a measure of inflation, which is not the end-all-be-all of measuring the country’s cost of living compared to other nations. And inflation is only one factor in that equation. The fact is that even though Israel’s inflation rate is better than that of the average OECD nation, prices in Israel are still high in a variety of industries.

Why then, if inflation is relatively low, does Israel suffer from such high prices?

“It’s not that we have high inflation, per se, it’s just that the prices here are very high relative to our incomes. Now, is it because the prices are high? Or because their incomes are low? That’s a different question,” explained Prof. Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research and an economist at Tel Aviv University.

“It’s most likely that prices are high because our median wage is relatively average in the OECD. In nearly every category – food, fuel, health – Israelis can buy a lot less with our incomes than the average person in the OECD, for a combination of reasons,” he said.

Among those reasons are historically low market competition due to overly restrictive regulations, an inability to curb the inflation rate at the same pace as other countries, and political uncertainty which has led to foreign investment declines.

Moreover, Ben-David highlighted another significant factor at play: low productivity.

“Productivity is low in Israel, so we’re relatively inefficient. Because productivity is low, our incomes are low because you can’t pay a person much if they’re not producing much,” he said. “That means that ultimately we can buy less stuff; but it also makes us less efficient, which raises the cost of stuff.”

SO, ALL things considered, the cost of living is pretty expensive in Israel. From food to hotels, from childcare to car insurance, Israelis are facing high prices across various essential sectors. And while the country’s inflation rate may be relatively low compared to other OECD countries, the overall prices remain a challenge for the average citizen. 

As Israel continues to grapple with the cost of living, one can hope for a future where affordability becomes the norm, and Israelis no longer have to break the bank just to make ends meet. Until then, the journey toward a more reasonable cost of living in the Start-up Nation continues, with challenges to be faced and solutions to be sought. 

At the very least, living in the land of milk and honey shouldn’t cost an arm and a leg. 