Monday’s housing cabinet is to consider competing plans for how to reduce real estate prices. On Sunday, Construction and Housing Minister Uri Ariel introduced an alternative to Finance Minister Yair Lapid’s proposal to eliminate value-added tax on new home purchases for young couples.
Ariel’s “targeted pricing” plan would require the Israel Lands Authority to make developers compete over tenders on land priced over NIS 100,000, by bidding down the maximum price at which they can sell the apartments they build on it.
Ariel said Lapid’s plan to eliminate the 18 percent value- added tax – restricted to young couples who were firsttime buyers, had served in the IDF or national service, had at least one child and were buying a new apartment – was only a partial solution.
A total of three-fourths of housing purchases are for second- hand apartments, and only 8% of the market are first-time buyers. Coupled with the other restrictions, the policy’s effect would not go far enough, he argued.
If the policy expanded to include home-owners, it would add another 10% of the market share, thus passing the “critical mass” needed to affect the market’s prices.
“The current model is an incomplete first step that can exacerbate the situation, and it does not include [home-owners upgrading to new homes] who can free second- hand apartments at reduced prices,” the Housing Ministry said.
The price targeting policy “is doubtless preferable and more effective than the finance minister’s proposal of canceling VAT for first apartments,” said IBI real estate analyst Shai Ezer.
The downsides, he continued, were that it won’t have an immediate effect on the market, and it could lead to a reduction in construction quality.
Lapid’s plan suffered a setback on Thursday when the Finance Ministry’s chief economist resigned in protest. The NIS 2 billion price tag on the VAT exemption would impose a heavy burden, he argued, and its popularity would make it difficult to overturn.
The Bank of Israel opposes the move, believing that it would add demand to the market. The bank would likely support the price targeting plan if it dropped the VAT exemption.
Lapid took to Facebook Thursday to defend the policy, saying “reducing the VAT is not aimed at economists, politicians or interested parties.
It is aimed at the young in the middle class, who served in the army work hard, are raising their children lovingly and cannot make it through the month.”
The implicit exclusion of Arabs and ultra-Orthodox from the VAT benefit, which would likely be challenged in court, has led to the postponement of setting out the plan’s legislative details.
Amid all the criticism, Lapid’s second plan, to install rigid price controls that would only allow rental rates to rise every three years, has taken a backseat in the public discussion. Yet it also managed to find its critics.
“The rental market is not a perfect market, government intervention of any sort is liable to harm its natural conduct.
Despite the good intentions, freezing rents in Tel Aviv may worsen things for tenants and lead to higher prices, since landlords will try to set a benchmark three years ahead of time,” said Yavin Gil-Mor, CEO of Yad2, a home rental website.
The company did a survey of average rental prices in the past three years, and found that while Tel Aviv rents were the highest in Israel (NIS 6,299 for a four-room apartment), prices increased faster in the periphery.
Rents rose fastest in Acre, where prices rose 15% (to NIS 2,850) in three years. Tiberias followed, with a 13% increase (to NIS 2,467 a month), followed by Ramle, with a 12% increase (to NIS 4,903). Tel Aviv came in fourth, with a 10% increase, while Jerusalem ranked ninth on the list.
There, rental prices rose 8% in three years, reaching NIS 4,903 in February.