Housing Cabinet approves VAT exemption, price targeting

Bank of Israel Governor Flug lays out laundry list of "shortcomings" in Lapid's plan to drop housing prices.

Yair Lapid  (photo credit: Reuters)
Yair Lapid
(photo credit: Reuters)
The housing cabinet on Tuesday unanimously approved Finance Minister Yair Lapid’s plan to eliminate value-added tax on some new homes, over the protestations of Bank of Israel Gov. Karnit Flug.
It also passed Construction and Housing Minister Uri Ariel’s plan, backed by Prime Minister Binyamin Netanyahu, to introduce target pricing on new land.
Many details of the VAT policy – such as proposals limiting the benefits to couples with children and people who have served in the IDF or performed national service – will be hashed out later, in part because of a worry that the High Court of Justice could strike down a law that discriminates against Arabs and ultra-Orthodox Jews, few of whom have served.
The VAT exemption would not apply to leases signed before the policy passes into law, and is to apply only to apartments priced at NIS 1.6 million or less (including VAT), though additional regional price variations may apply. For five years, couples will be barred from selling the property, but not from renting it out.
VAT is not charged on purchases of second-hand homes.
Netanyahu gave the plan his full backing, though he only mentioned the price-target portion in his remarks.
“Today, we are taking a significant step toward the goal of reducing housing prices.
We will set a ceiling price for projects and will sell land to contractors at lower prices, on the condition that they will commit to a price for selling to the public,” he said.
Following Thursday’s resignation of Finance Ministry chief economist Michael Sarel over the VAT exemption proposal, Flug laid out her own laundry list of the plan’s “shortcomings” on Tuesday.
Eliminating the 18 percent VAT, she argued, would increase already soaring demand for apartments, which, given the short-term limits on supply, will drive up prices. The bill requires complex supervision and oversight, which will burden the government and likely lead to further distortions in the market.
The NIS 1.6m. limit on prices is high enough that relatively well-off people will still benefit from the exemption, she continued, while nothing in the program helps poorer people, who will suffer from the eventual increase in new home prices.
Politicians are loath to overturn such popular exemptions once they are in place, she noted, and often expand them over time. As is, the NIS 2 billion annual price tag is unfunded and will likely grow in the future.
Flug sounded cautious optimism about the targeted pricing plan, saying that in principle it can reduce prices but it will require flexibility and sound implementation.
Under the target-price plan, the finance minster will lead a team that includes the housing minister, Israel Lands Authority director, Prime Minister’s Office director and a representative from the Attorney-General’s Office to set a maximum price for apartments built on newly released ILA land. That price must be 20% below market prices at the end of 2013. It will not apply to areas released by the IDF or to communities where the potential for at least 500 housing units does not exist.
Following the approval of the plans, Lapid, chairman of Yesh Atid, sounded a renewed note of unity with Bayit Yehudi’s Ariel following several days of acrimonious bickering and attempts at headline grabbing over the policies.
“Prices will fall because we are continuing to work together, continue to think outside the box, not fearing new solutions for even a moment just because we know the old ones better, and staying focused on the only thing that really matters: an entire generation that is looking to us and expects us to work for it,” Lapid said.
Ariel, too, praised the two plans for the effect they will have working in tandem. “By combining the two proposals, I believe that we can effect a real change in the housing prices in Israel and give young couples and non-first-time home buyers access to apartments.”
Market analysts were less enthusiastic.
“The steps the housing cabinet announced indicate, more than anything, a loss of control,” Rafi Gozlan, chief economist at the IBI investment house, said. The key to bringing down prices, he said, was increasing supply and hitting real estate investors with more financial disincentives.
“This is the most populist decision that has ever come out of the Finance Ministry,” scolded Eldad Tamir, CEO of the Tamir Fishman investment house. “This decision will lead to an increase in housing prices, in stark contrast to the fact that housing prices must come down. This is not an economic or professional decision, [but a decision] whose whole purpose is to be seen favorably in a specific sector, at the expense of the general public.”
Meretz chairwoman Zehava Gal-On laid into Lapid, echoing many of Flug’s criticisms and adding a few of her own.
“The Central Bureau of Statistics recently published data showing an increase of over 120% in housing starts in the settlements,” she said.
“Just today it was revealed that just 2,765 apartments were put on the market since the start of 2014 – a rate four times slower than what is necessary to deal with the current supply – while 60% of the land marketed was beyond the Green Line.”
Lapid should not try to find quick fixes for a market that took a decade to be destroyed, she said.
In addition to the VAT and price-target policies, the cabinet set a 60-day deadline for reexamining rent regulations, and approved financial incentives for local authorities to speed construction.
Under that proposal, local authorities will receive a bonus if they approve permits for more than 200 units in a fiscal year and register a 10% increase over the annual average from 2010 to 2012. Those authorities that increase permits by 50% will receive NIS 9,000 per regular housing unit and NIS 12,000 for urban renewal units, while those who remained under 50% will receive NIS 7,000 and NIS 10,000, respectively. The perks will be limited to 12,000 units for all local authorities and be valid through 2016.