Romancing the investors
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Constantly rising and falling, like the tide, the share of homes bought by investors reached 33% in 2010, but has since settled down to a significantly lower 23%. These investors could be likened to a swarm of locusts storming every lush field in sight, devouring what they can and moving on to their next target. The swarm needs good breeding conditions to flourish, including low interest rates, lack of better investment opportunities, low taxes and supportive government directives.

Laying the blame for rising housing prices partly on investors, the finance and housing ministries decided at the beginning of 2011 to wage war. If investors would abandon the market, the treasury reasoned, prices would start leveling off or even declining.

To this end the ministry took a carrot-and-stick approach. The carrot - granting a full exemption from betterment tax on two additional dwellings, with a NIS 2.2-million ceiling on each, until the end of 2012. The stick - reducing receipt of the standard betterment tax exemption on the sale of a home owner's second housing unit from once every four years to just once every eight years.

Indeed, the proportion of investors among home buyers dropped and the treasury patted itself on the back. But in the humble opinion of this writer, the decline in the rate of investors had less to do with the treasury's moves than the feeling that the market had run out of momentum and that it was time to get out.

Last month, however, we were informed that the sword of Damocles hovering over investors - the policy whereby the betterment tax exemption is available only once every eight years - had been removed. Everyone can breathe a sigh of relief: Once again the exemption will be available every four years, just like before. Investors now aren't sure if the treasury likes them or loathes them: whether it wants them to fill the void in supplying rental homes or still sees them as a threat or a bitter enemy.

Current conditions for potential real estate investors are as follows: 1. Fixed and variable rates on mortgage loans have dropped back to their low of nearly two years ago. The prime rate, for example, is just 3.75% so the mortgage rate for an average borrower would be under 3%, factoring in the bank's negative spread; 2. There remains a full exemption from income tax on rental income of up to around NIS 58,000 a year; 3. There is a full and unlimited betterment tax exemption on the sale of one extra dwelling every four years; and, 4. Returns on alternative solid investments like fixed deposits or Makam are close to infinitesimal.

Beyond all that, the housing market appears sturdy without any signs of a significant drop in prices. Therefore chances are reasonable that prices will continue climbing moderately.

End of war

So back to the question of whether the lawmakers are pro or against investors. Like the saying: "If it walks like a duck and quacks like a duck," the latest decision on betterment taxes effectively closed the file on the "State of Israel vs. the investors." The state has reestablished the romance it pursued in 2009 and 2010 with this public.

Was it at all necessary for the treasury to declare war on real estate investors? These people hold an eminent place in the housing market food chain. In Israel 70% of all homes are owned by their occupants. Everyone else, in one sense or another, is a renter.

In its 64 years of existence the State of Israel hasn't succeeded in establishing a credible "producer" for the product called "monthly rental housing." On the contrary, the proportion of housing units that the government provides the public has been constantly in decline for over the past decade. Developers seldom ever build projects slated for rental. The field is left almost entirely in the hands of small-time landlords acquiring just one or two homes at a time, and so attacking this group means damaging the only "factory" supplying this product.

A reduction in the supply of rental housing has an immediate impact on rental prices in the market. Is it any wonder we've seen rents climb following the measures taken against investors?

Mr. Finance Minister and Mr. Housing Minister: Couldn't you already have grasped this delicate balance and its implications six months ago when you declared an all-out war against the real estate investing public? Tenants generally belong to the populace who are lacking the means to buy a home. Was the harm to this group taken into account?

And investors: What are you waiting for? Go out and invest.

And good luck.

The writer is an expert in income-generating real estate investment, a consultant, lecturer, and author of Nadlan Be'Jeans (Real Estate in Jeans ). Questions and comments at www.rej.co.il.