Say VAT?

The odds indisputably are that while Lapid’s quick-fix will markedly jack up housing demand, it won’t increase supply.

Yair Lapid  (photo credit: Reuters)
Yair Lapid
(photo credit: Reuters)
Are substantial projected changes to our taxation and housing markets really outside the purview of economists? To hear our finance minister, Yair Lapid, in a series of recent pronouncements, this is indeed so. He all but called on economists not to stick their learned noses into his much-ballyhooed plan to exempt given first-time home purchasers from VAT if they purchase a given type of home.
“This plan,” he maintained, “is not for economists.”
That assertion in itself is bewildering. One would assume that this is precisely the stuff with which economists are trained to grapple. It’s one thing to debate them and take issue with their warnings. It’s quite another to claim, as Lapid has, that his proposals are outside their professional scope.
Lapid isn’t the first finance minister without an economic background and without much education in general. But reliance on one’s native intelligence must surely incorporate readiness to take on board expert opinion.
In this case, the negative response to Lapid’s scheme has been near unanimous and includes even Bank of Israel Governor Karnit Flug. The Finance Ministry’s own chief economist Michael Sarel resigned in protest. It’s only in political forums, like the Housing Cabinet, that Lapid’s panacea garners support.
Lapid is clearly seeking to appeal to his presumed middle- class power base, which is why he initially sought to limit benefits to IDF or national/civic service veterans (only fear of the Supreme Court led him to ditch these preconditions).
But what advantage does his concept actually offer mainstream young couples? The overwhelming majority (some 75 percent) of first-home real estate transactions involve secondhand apartments, where VAT isn’t charged. This makes Lapid’s proposal irrelevant in all too many cases.
Moreover, his proposal would apply only to flats whose price doesn’t exceed NIS 1.6 million. This limitation effectively removes too many properties from the equation, and it removes the benefits Lapid promises from the context of the most sought-after locations in central Israel.
Additionally all this wouldn’t prevent contractors and well-heeled investors from resorting to non-elaborate ploys to profit from Lapid’s exemption. The program’s inbuilt complexities will impose inordinately heavy encumbrances on an already overloaded system. The inevitable result would be inadequate supervision or an off-kilter economy.
BUT MOST worrying of all are the elementary supply- and-demand implications for the housing market.
Lapid may not like it, but housing costs – like the prices of anything we buy – are the function of the amount available versus the interest in said product.
The very scrapping of the 18% VAT would further drive up the already massive demand. There’s no conceivable way that supply can catch up with increased demand when it already cannot meet existing demand.
This involves far more than making more public land available. It also necessitates increased imports from abroad – particularly of labor, including of professional construction foremen, as well as of supplies and equipment. Other prerequisites are for bureaucratic streamlining, the lifting of planning requirements and much more – not all with desirable consequences long-term for Israeli society. Most significant, such changes cannot be made overnight, and therefore no immediate impact is possible.
The odds indisputably are that while Lapid’s quick-fix will markedly jack up demand, it won’t increase supply.
The widening gap between the two cannot but affect costs.
The victims, inexorably, will be the less well-off prospective home-purchasers who will see prices spiral, making housing all the more unaffordable for them.
Lapid cannot ignore all this, much as he praises himself for “thinking 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’s looking to us and expects us to work for it.”
Good intentions and wishful thinking can’t defeat market forces. To imply otherwise is populism, which presumes to pit the common man against a faceless elite and the hope-engendering new against the supposedly failed old.
Populist self-serving rhetoric and unrealistic catch-all cures have always only made bad situations worse. Hence, it’s reckless to dismiss economists and economic realities.