Lapid’s plan

Top economists have strongly opposed Finance Minister Yair Lapid’s plan to lower housing prices, warning that it could ultimately cause more harm than good.

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May 12, 2014 23:12
3 minute read.
Finanace Minister Yair Lapid

Yair Lapid . (photo credit: Reuters)

 
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Since it was first presented in March, top economists have strongly opposed Finance Minister Yair Lapid’s plan to lower housing prices, warning that it could ultimately cause more harm than good.

Shortly after Lapid announced the plan, which would exempt some first-time home buyers from an 18 percent value-added tax, Finance Ministry chief economist Michael Sarel resigned.

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In a letter to Lapid, which he shared with the media so as to publicly distance himself from the program, Sarel said the proposal was “wrong in my opinion from almost every possible perspective.”

Bank of Israel Governor Karnit Flug also spoke out against the plan after it was passed in the cabinet.

Both Flug and Sarel said that eliminating the VAT without increasing the supply of new housing would push up prices, making it even harder for Israelis to buy a home.

Young couples who meet the criteria, which include completing military or national service and having at least one child, will certainly benefit from the purchase of a home without VAT.

For some time, however, there has been a consensus among economists that red tape and bureaucracy in the Israel Lands Authority and in local bodies governing land allocation are the main cause in the shortage of housing starts.



This combined with low interest rates, making mortgages more affordable and causing a rise in demand, has been pushing up prices for years.

According to a Bank of Israel report, at the end of 2013 it took 147 average salaries to buy an average apartment. An OECD study found that Israelis need 191 monthly salaries to buy an average five-room apartment, compared to 90 in France, 71 in the United Kingdom, 60 in the US, 54 in Germany and just 30 in Sweden.

Instituting Lapid’s plan would place undue financial and bureaucratic burdens on the government, which would be tasked with verifying all the applications and ensuring that buyers not sell within five years of purchase.

It would also generate a shortfall in tax revenues of about NIS 2 billion. New taxes would have to be instituted to cover the loss, resulting in a shift of the tax burden from one group to others within the population. And once tax exemptions are instituted, they are notoriously difficult to abolish.

Now there is another reason to oppose Lapid’s program. As already mentioned, the finance minister proposes exempting only those Israelis who have served in the IDF or have done national service.

As a result, haredim, who have been given sweeping exemptions from military service if they devote themselves to Torah study and Arab Israelis, who are exempt by law from military service altogether, will not be eligible.

In a feeble attempt to get around the High Court’s inevitable rejection of the plan due to its discriminatory nature, Lapid reached a compromise with the Justice Ministry according to which those who did not serve in the IDF will receive the exemption only for “cheap housing” – apartments that cost NIS 600,000, including VAT, or less.

The problem is that there are relatively few new apartments in the market that are for sale in this price range. According to data provided by the Construction and Housing Ministry, in 2013 there were only 364 new housing units sold at a price of under NIS 600,000 including VAT. With prices continuing to rise, it is logical to believe that this year and next year, there will be even fewer.

Lapid should cut his losses now and scrap his VAT plan. It makes no economic sense. Instead of lowering prices, it will jack them up; instead of cutting red tape and bureaucracy, it will generate more; and instead of helping the two fastest growing populations in Israel who suffer most from the ongoing housing shortage, it discriminates against them. The plan is lacking from nearly every possible perspective: socially, economically and democratically.

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