The wrong solution to the housing crisis

Kahlon’s proposed new property tax will backfire.

By DAVID FIELD
August 1, 2016 21:03
4 minute read.
Nof Zion

Apartment blocks in Nof Zion.. (photo credit: REUTERS)

 
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Finance Minister Moshe Kahlon is planning to introduce a new property tax. Anyone who has more than three apartments, will, for every additional apartment, pay a flat tax of NIS 1,000 month. The tax will be imposed regardless of apartment size or the amount of rent collected, if any. His intention is to force owners to sell their apartments, thereby bringing down prices. Two questions have to be asked: is it fair, and will it work.

While Kahlon undoubtedly has asked the second question, he may not have been bothered by the first. Consider the following: Last year, he decided to raise the purchase tax on second apartments from five to eight percent. The tax is also paid by foreigners buying in Israel.

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His intention, then as now, was to discourage people buying to let. Critics claimed that it would not deter people from buying, and that instead they would just pass on the cost to tenants, increasing rents. Kahlon proceeded with the tax, and announced that it would come into effect on July 1, 2015.

People who were planning to sell one property and buy another proceeded to expedite the transactions before the given date.

In order to catch these people out, Kahlon brought forward the date of the tax hike to June 24, with only two days’ notice. The result was that people who had sold one apartment at a price which would have allowed them to complete the second transaction were now left stranded. Either they had sold their home and did not have the money to buy the apartment they planned to move to, or were left with a shortfall of easily NIS 80,000 or more.

It was a despicable move, with serious financial consequences for many people.

While Kahlon will justify breaking his word for economic reasons, it is not something he should feel proud of.

His new property tax is likewise unfair.

Investment planning is something which is done with the long-term in mind. Small investors and property developers alike will have made a detailed analysis of tax, expenses, mortgage costs and income when planning ahead with financial advisers. The small investor may have purchased several small units, with the rent being his retirement income for him and his family. The larger investor will have spent considerable money to finance the refurbishment and modernization of a property. Given the taxes, development costs and mortgages both types of investors will be paying, the arbitrary tax could leave the smaller investor without sufficient income, and the larger investor facing repossession by the banks.

The second question is, will the new property tax work? In the short term, it could force people to sell their apartments, increasing the number of units available, and temporarily lowering prices. However, people invest in property for the long term, and most, certainly those who already own properties, will more likely still take a long-term view. Especially given the capital gains tax sellers would be forced to pay, a more probable scenario is that they will simply pass on a large part of the cost to the tenants, causing rents to increase.

The tax could also result in less apartments being built and available for rent. A high proportion of units in new developments are purchased by investors. The reason that more home owners do not purchase them at the initial sale price is because they do not have the money. If the investors are not there, builders will simply not continue with new developments, resulting in less apartments available to rent, higher rental prices, and more young couples living in converted parking lots.


Kahlon has spoken about his intention to bring in building companies from abroad to increase competition.

That will hit the Israeli firms and send money out of Israel. Forcing builders to build at lower costs, when margins are already low, will invariably lower construction standards. Especially given the situation in Israel, where buyers can spend years, often in vain, toiling to get justice from the courts for building work which is seriously below standard, this is a major concern.

It will also result in smaller units, a trend already evident. These are fine for the newly married, but as families grow and cannot afford to move, the new developments of today will become the overcrowded neighborhoods and slums of tomorrow.

The other concern is that if the government did succeed in drastically reducing prices, it could seriously hurt the economy. Usually, crashes in the housing market go hand in hand with recession and depression.

So what is the solution? While I don’t think its fair or effective to force existing landowners out of the market, there is a strong case to be made that such a basic and scarce commodity as housing cannot be left to pure market forces.

Especially in Israel, where people earning shekel salaries have to compete with those from America and Europe.

I would argue that once a house goes up for sale, or a new development is marketed, there be a period of six months or a year before those who already own an apartment, or non-residents, can bid. This will create a more level playing field, causing an adjustment in prices and giving Israelis a better chance to get on the property ladder. At the same time it does not totally exclude investors and developers from the market, and recognizes the crucial role they play in financing developments and providing units for rent.

In contrast to Kahlon’s new tax, the above idea is fair, and has real potential to cool down the property market.

The author made aliya from London in 2009. He works as a software developer in the financial sector.

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