Analysis

Housing Market Looks Like 2014 — Just Before Prices Surged Higher

The risk of Machir L’Mishtaken failing and early elections could spur a surge in demand

A new neighborhood in Hadera, November 9, 2017
A new neighborhood in Hadera, November 9, 2017 Eyal Toueg

The calendar says 2017, but in the Israelis housing market everything looks like it’s 2014 all over again.

That was the year then-Finance Minister Yair Lapid announced his Zero VAT plan, which would have exempted many categories of home buyers from the value-added tax. The idea was to stem the rise in housing prices by eliminating the tax for many buyers.

Zero VAT had its effect, although not the one Lapid had counted on. Anticipating the tax cut, potential buyers held off purchasing a home and the number of home sales dropped and price rise moderated.

Prime Minister Benjamin Netanyahu announced in September 2014 he wouldn’t support the plan, buyers piled back into the market and prices took off. Early elections made things worse by creating uncertainty over housing policy in the next government.

Three years later, the housing market looks distressingly similar. Based on figures for the first nine months of 2017, a report released by the treasury’s chief economist Tuesday predicted that 100,000 homes will be sold, down from 111,000 in 2016 and a record high of 120,000 in 2015.

In the third quarter, the number of homes bought by young couples (first-time buyers) sunk to 10,600, the lowest since third-quarter 2014 when the promise of Zero VAT was having its effect.

The treasury report doesn’t address the issue of prices but it does make the connection with a decline in home sales. The Central Bureau of Statistics reports on prices and its latest figures for the year through September showed them rising 4.2%. That’s about the average rate of increase for the years 2011 and 2014.

But on average in 2012 and 2015 prices rose 8% due to pent-up demand from the previous year. In 2012, demand exploded after a slump due to the social protests of 2011; in 2015, Lapid’s abortive Zero VAT scheme caused an artificial downturn in demand.

In 2017, Zero VAT is history but Finance Minister Moshe Kahlon has his own plan. Mahir Lemishtaken (“buyer’s price”) has had a big impact on the market. First-time buyers purchased 3,500 new homes in the third quarter, 40% of them through the program. Without it, new-home purchases would have been at the same level as the 2014 low.

But will the program survive?

“Mahir Lemishtaken will be here for a very long time,” Benny Dreyfus, the head of marketing at the Housing and Construction Ministry, promised at a conference last week.

But the number of units included in the program’s lotteries is falling and the program has come under sharp criticism. It seems the young couples Mahir Lemishtaken targets are having second thoughts. Demand for homes in the periphery has fallen sharply and the homes in the program won’t be ready for a long time.

Meanwhile, the drumbeats of early elections are sounding louder. The last two elections were accompanied by rising home prices as buyers decided not to wait and see.

On top of the concerns about Mahir Lemishtaken and early elections, there are fundamental developments in the market that point to accelerating home prices.

The first is housing starts, which the Central Bureau of Statistics reported fell sharply in the first half of the year, pointing to contracting supply.

The second is the role of investors in the market. Kahlon has sought to deter them by raising the purchase tax on homes and (abortively so far) imposing a tax on the owners of multiple homes. For the last six quarters investors have been net sellers of homes, as much due to Kahlon’s efforts as low return on rentals because prices have become high.

But that has also led to a net drop in the stock of rental homes, which could lead to a sharp increase in rentals. If so, investors may return to the market, boosting demand again for housing.