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New Minister Old Strategy

kahlon-640x310There is a new minister of finance in Israel and his name is Moshe Kahlon.

His ability to capitalize on the cellular reforms associated with his previous office, that has seemingly dissipated the monopolies in the industry and reduced all of our cellphone bills to a fraction of what they used to be, just about guaranteed his appointment as finance minister.

Let’s see what he does to lower housing prices.

One needn’t be a high level political analyst to know that Mr. Kahlon’s success and political future lie in large part to what he is able to accomplish (or unable to accomplish) in cooling down  the scorching real estate market in Israel.

In April there was word that purchase tax would increase substantially for investment properties (any property purchased by either a foreign buyer or by a local buyer with at least one other property).  In interviews given by ministers in the finance and treasury ministry there was talk about a 20% purchase tax across the board on all investment properties.

According to these “experts” 20% is the magic number that would both drastically reduce the number of real estate transactions while still maintaining if not increasing government income from those very transactions.

The speculation surrounding the planned increase in purchase tax was tantamount to a viral video ad announcing a 50% discount in the apple store.  There was a whopping 30% increase in purchase tax in May when compared to May of last year.  In other words instead of slowing the market down the new ministers and finance clerks fed the market speed.

There was also a barrage of criticism by real estate experts and economists alike.  The most logical being that by crushing the demand of real estate investment purchases you are by default decreasing the number of apartments for rent thereby increasing rental prices.  This is still a free market…

Another attack on this planned 20% increase came from Bank of Israel which for obvious reasons is not so keen on seeing property value threatened by extreme short term government  fixes.   There are probably more citizens that own real estate, many of whom have taken out mortgages, than those who do not own any property in Israel.  Reducing prices a la government manipulation can have a devastating affect on the banks, home owners, and the Israeli economy as a whole.

Aside from that, because the reduction is not aligned with the basic principals of supply and demand, it is likely to be a short term solution which will quickly catapult prices back up, once the effects have worn off.

The government has since reformed their statements and added new incentives to detract from the criticism and reduce the speculation ‘apartment buying frenzy’ that took place in May.  The new purchase tax according to Globes is now planned to reach 8% not 20%.  To counter those claiming the tax increase will increase rental prices as well, there is also talk of increasing or broadening tax on rental income which according to today’s law is only collected on apartments that are rented for more than NIS 4,800.  In this case as well reality and theory are not aligned.  Very few tax shekels are collected from rentals charging more than NIS 4,800, why should now be any different?  With a shortage of investment properties on the market due to the purchase tax increase, even if every landloard magically started paying taxes who will really be paying that tax increase?  Certainly not the investor looking out for his or her return on investment.

Increasing rental prices will force young couples / families to either move back in with mom and dad or … take out a mortgage and buy an apartment! – Thereby increasing the demand, and we are back to square one.

Other proposed reforms include capping rental prices, reforming the betterment / capital gains tax for sellers and dissolving or limiting the current exemptions i.e. in case of an inheritance and even for those who will ultimately only own one home but are upgrading etc.

Ultimately many experts will tell you that these proposed solutions are superficial.  The only way to really reduce housing prices in a responsible manner is by gradually increasing supply.  The way to do that is by first lowering the cost of land which ironically is almost all owned by the Israeli government who is working so hard to solve the very problem they have been causing.  Real solutions include continuing to expand the center of the country via transportation and giving real incentives to increase commerce in northern and southern Israel.    There are also excellent examples abroad of government projects to help the less fortunate obtain housing that we can certainly learn from.  But when the deputy minister of treasury responds to the question of why the government is releasing more land at reduced rates with: ‘the price for land is just one of many parameters that make up the price of housing,’ it doesn’t look like a real solution to housing prices is anywhere in sight.

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