After Two Years, Israeli Law Designed to Add 250,000 Apartments Fails

Incentives to divide single-family homes into rental units gets no traction

A housing project in Rosh Ha’ayin, February 2019.
Tomer Appelbaum

Two years after a law was passed allowing homes to be divided into smaller apartments, the legislation has entirely failed to create the 250,000 small units for the rental market that its backers promised.

A report by the National Planning Administration shows that in the first half of 2019, only 36 building permits were issued from among 126 applications to divide apartments filed with local zoning boards. Only 71 permits have been issued since the law went into effect.

The city with the most applications in the first half of the year was Rehovot, with 26. Of them, only five were approved. Rosh Ha’ayin had the highest approval rate, 12 of 18 applications.

The Law for Dividing Apartments (Amendment 117 of the Planning and Building Law), was initiated by Economy Minister Eli Cohen and approved as an emergency regulation in force for five years in July 2017. It created fast-track process for owners of single-family homes to divide their properties into smaller units of at least 45 square meters (485 square feet). The approval of local authorities was required for all projects.

The law, which was approved by the National Planning and Construction Council, aimed to help end a critical shortage of small rental apartments.

Off target.

Coming at a time of soaring home prices, officials saw rentals, which accounts for a relatively small part of in Israel’s housing market, as one way to encourage young couples to delay buying their first home and thereby cool demand.

The law contained other incentives for homeowners, among them an exemption from the usual requirement to build a bomb shelter (mamad) in each unit and easier terms for paying the property improvement tax.

Among the reasons experts cited for the law’s failure were the reluctance of local governments to add to their housing stock, which creates more demand for services and infrastructure, and homeowners’ fear of having to pay betterment tax.

Many worry they won’t be able to sell the smaller units when they want to.

“The government has tried to create thousands of apartments overnight without taking into account people’s real needs, so the whole undertaking was doomed to fail from the start, especially in areas where housing demand is strong,” said Haim Bibas, chairman of the of the Federation of Local Authorities and mayor of Modi’in-Maccabim-Reut.

“Dividing homes without advance planning and through building permits alone would have created a big mass of housing units without any of the required infrastructure,” he explained.

Some mayors, Bibas said, sought to meet the law’s terms that allowed up to 20% of all single-family homes to be approved for division because they recognized the need to create more housing quickly. But, he said, applications never came close to that level.

Ariel Kamenkowitsch, a lawyer specializing in zoning and building law, said the law was “not attractive economically for any of the parties involved.”

For owners of the single-family homes where the law applied, the cost of dividing their properties would run about 100,000 shekels ($29,000) in taxes and other requirements. “But, under the law, they can’t sell the divided property, they can only rent it,” he said.

The reduction in the betterment tax served as an incentive to homeowners but a disincentive to the local authorities that had to approve the permit, said Kamenkowitsch. “If the [local] authority is getting no real income from the splitting of housing units that they can use to expand infrastructure and develop public services, it has no real economic incentive to encourage housing being divided up in its jurisdiction,” he explained.

Aryeh Kamil, a property assessor with the firm Kamil Treshanski Refael, compared the law with Tama 38. The national building plan was designed to encourage earthquake-proof housing by allowing apartment owners to team up with builders to improve and expand their buildings as the reinforced them, but it was opposed by local authorities.

“You add housing units and create for crowding in neighborhoods without creating an economic incentive to municipal development,” he said.

Meanwhile, as officials continue to cast about for quick-fix solutions to the housing crisis, the problem of so-called ghost housing remains. A survey by the Knesset Center for Research and Information published last April found a large stock of housing in Israel that stood empty most of the year.

Using data from the Central Bureau of Statistics it found that in 2017 it found there were about 19,000 such units in Tel Aviv alone. Other cities with big stocks of ghost housing included Jerusalem (15,000) and Haifa (10,000).

To encouraging owners to make the homes available to renters, an emergency order was issued in 2014 that entitled local authorities, with permission from the interior and finance ministries, to impose higher municipal tax rates (arnona). However, TheMarker revealed in May that of 200 local authorities, only those three cities had imposed the higher rates.