Real estate prices in Israel have nearly doubled since 2007 and, over the past decade, soaring housing costs have been a hotly debated political issue. New Minister of Finance Moshe Kahlon’s first promise has been to overhaul the real estate industry and stabilize real estate prices. Kahlon comes into this new position with significant political clout, based on his success – while serving as the Minister of Communications – in breaking the telecom industry cartel and boosting competition, thus causing prices of cellular services to decrease significantly.
Background
There are numerous reasons why housing prices have risen so dramatically. One cause is the long bureaucratic process of developing new properties. A recent report by the Taub Center for Social Policy Studies found that the average time to complete a new residential project is thirteen years – eleven to clear bureaucratic hurdles and two for construction. In comparison, the maximum time it takes to obtain a building permit in most European Union countries is three months.
Another reason why housing prices have risen is due to the Israel Lands Authority’s (Minhal) historically slow pace of selling government land for development. This was deliberately done to create strong demand, causing land sale prices to rise and, in turn, increase the country’s sales revenue. The high land prices paid by developers is ultimately borne by the apartment buyers.
Another challenge has been the lack of manpower in the construction industry, causing delays to occur and labor costs to rise.
Supply-Side Reform
Last week, Finance Minister Kahlon unveiled his multi-tiered plan to reform the real estate industry. The plan included many “supply side” solutions to increase the number of new housing units entering the market, including aggressively rezoning land to residential usage, converting offices to residential units, creating a new urban renewal authority to streamline the process for upgrading existing older buildings, and addressing the shortage of manpower by implementing training programs for Israeli workers and bringing in more foreign workers.
Demand-Side Reform
Kahlon also addressed the “demand side” of the equation by raising taxes on investment properties, thereby making them a less attractive investment. An “investment property” is defined as a property purchased by either an Israeli who already owns a primary residence or a foreign buyer who owns a home overseas. By reducing investor demand, the government hopes to limit price increases, thereby helping young families to have affordable housing opportunities.
According to the approved proposal, the purchase tax for overseas buyers and investors will be raised to 8% on the first NIS 4.64 million NIS and 10% above that amount. Compared to the current acquisition tax rates, these new rates will add at least 2% to the purchaser’s tax bill.
Status
On June 14, 2015, the cabinet unanimously approved increasing the purchase tax for investment, and the Ministry of Finance plans to pass this law by the end of the month. These reforms are expected to easily be approved, as it has backing from Netanyahu’s cabinet and the opposition - comprised primarily of the left-leaning Knesset factions – who also want these reforms implemented as it dovetails with their liberal agendas.
Detractors
Not everyone agrees with the tax increases. Many of the apartments purchased for investment are providing housing for the rental market, in which demand for rental units greatly outstrips supply. By restricting real estate investments, the government will further tighten the rental market, causing rents to increase.
Conclusion
Over the years, the Israeli government has taken numerous steps to reduce housing demand by imposing new mortgage restrictions and by increasing acquisition taxes for both overseas buyers and Israelis who own multiple homes. These initiatives were met with failure because they did not address the most pressing issue of increasing supply in our housing-starved country. Unless the “supply side” programs are implemented quickly and aggressively, raising the acquisition tax on purchases will not cause prices to decline, due to the relative scarcity of available housing.
Therefore, we believe that the best long-term approach to stabilizing housing prices is for the government to (1) make more land available for development, and (2) design and implement a plan to streamline the planning and approval process in order to quickly develop new housing units.
Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at gborvick@gmail.com.