Gov’t tackles the housing shortage

New measures raise purchase tax on investment apartments and cancel the betterment tax for sellers of a second or third investment apartment.

construction tel aviv 311 (photo credit: Ariel Jerozolimski)
construction tel aviv 311
(photo credit: Ariel Jerozolimski)
The government on Thursday announced steps to increase the purchase tax on investment apartments and cancel the capital-gains tax on the sale of second and third apartments for a period of two years, all in an effort to boost housing supply and lower prices.
“We are seeing signs of a slowdown in the overheated real-estate market over the past three months following a package of measures we introduced in the last six months,” Finance Minister Yuval Steinitz said Thursday at a press conference in Tel Aviv. “This is good, but it is not enough to solve the problem and cool down the market and property prices.”
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“About a month ago, we introduced a package of measures to encourage contractors and landowners to initiate the release and sale of land,” he said. “Today, we are introducing a number of tax measures and incentives for a certain period of time, which will both tighten the conditions of buying an apartment for investment purposes and encourage their sale, so that more housing will be freed up and available for first home buyers in general and young couples in particular.”
Steinitz said real-estate prices in Israel have increased by more than 20 percent over the past year as a result of low levels of construction over the past five years and a low-interest environment following the global economic crisis, creating a lack of supply in housing.
In recent years, the number of apartments purchased as investments has increased sharply, representing 30% of all housing transactions in 2009, which in turn has contributed to the surge in real-estate prices and made it harder for first-time home buyers and young couples to find available and affordable housing.
In reaction to this trend, the Finance Ministry is raising the purchase tax on investment apartments – the purchase of a second or third apartment.
For the next two years, the tax will be 5% from the first shekel, compared with the current 3.5%, and 6% on NIS 1 million to NIS 3m., compared with the current maximum levy of 5% on any amount above NIS 1m. In addition, on any amount of over NIS 3m., a purchase tax of 7% will be levied.
In an effort to accelerate the sale of apartments, the Finance Ministry has decided to cancel the betterment tax, which is the capital-gains tax on apartment sales, for sellers of a second or third investment apartment for a period of two years. Currently, apartment owners who want to sell need to wait four years to be exempted from the capital-gains tax.
“The effectiveness of the steps taken will not be felt immediately within a few days but will take months and up to a year,” Steinitz said.
The cabinet is expected to vote on the steps at its weekly meeting on Sunday, or at the following week’s meeting at the latest. The measures are expected to go into effect on January 1.
“The low interest-rate environment has doubled transactions of apartments for investment purposes,” Construction and Housing Minister Ariel Attias said at the press conference.
“The incentives that are being introduced for a temporary period are tailored to encourage people who bought a number of investment apartments to sell off fast. Therefore, the aim is to boost the supply of existing apartments rather than new land.”
Attias said his ministry has over the past year doubled the tender and marketing of land, from 15,000 units a year to 30,000 units.
“However, to meet housing demand we need to market an average of 40,000 units a year,” he said.
Contractors Association director Yossi Gordon said the capital-gains tax exemption on the sale of a second or third apartment and the hike in the purchase tax, although a positive move, would not increase the supply in housing but rather lead to a shortage in rental apartments and a surge in rental prices.
“The sale of investment apartments will only lead to a switch from tenants occupying the apartments to owners doing so,” he said. “There is nothing real being done to increase housing supply, since these apartments are not now empty but rented out.”
“The market can not be cooled down with an increase in taxes,” Gordon said. “The move is wrong and will only lead to a rise in rental prices, while also hurting young couples, who already understand that they cannot afford to buy an apartment and thus will have to continue to rent.”
Finance Ministry officials said Gordon’s argument was economically invalid because the opposite effect would result from the measures. As more people move from tenancy to ownership of an apartment, rental demand would decline along with rental prices, they said.
Last month, the government announced three short-term measures in an effort to ease the sharp surge in property prices and speed up new construction.
Starting in 2011, the government will reduce the betterment tax rate on private land bought before 2001 from a maximum of 45%, to 20% for a limited period. The government hopes that the measure will encourage the release and sale of some of the 1.9 million dunams of privately held land and boost the development and supply of homes.
In addition, contractors will be eligible for a 15% rebate on the price of land tenders issued by the Israel Lands Authority if they finish construction of at least 80% of apartments in a project within 30 months.
The third measure entails regulatory easing and assistance to enable mayors and local authority heads to advance and speed up development plans and permits for the building of apartments and public facilities for new neighborhoods such as schools, kindergartens and parks.