Israel's Finance Ministry: Tax on Three or More Apartments Will Bring Down Rents, House Prices

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Bank of Israel Governor Karnit Flug and Finance Minister Moshe Kahlon, March 9, 2016.
Bank of Israel Governor Karnit Flug and Finance Minister Moshe Kahlon, March 9, 2016.Credit: Olivier Fitoussi

The proposed tax on owners of three or more apartments will bring down both apartment prices and rental prices, countered the Finance Ministry’s budgets director Tuesday, in response to a statement by Bank of Israel Governor Karnit Flug on Monday that the tax would push up rental costs.

“The proposed tax can be expected to contribute to a certain decline in home prices, especially for those buying their first homes. We still cannot estimate the extent of the decline,” Flug said during a press conference for the central bank’s monthly interest rate announcement.

As to its effect on rents, she said: “We’re seeing here a trade-off. The government has chosen where to flex its muscles. It’s obvious that the significance of a tax like this is that it will act to bring down housing prices, even if it comes at the cost of higher rents.”

New apartments at the planning stage in Jerusalem.Credit: Totem

The tax has been proposed by Finance Minister Moshe Kahlon in a bid to rein in home prices and make the market less attractive to investors.

Budgets Director Amir Levy responded to Flug by letter, stating that the ministry believes the proposal will bring down both purchase prices and rents. There has been a positive correlation between the two for the past 20 years, he noted.

If homes cost less, buyers won’t have to charge as much in rent in order to make renting them out worthwhile, he stated.

Levy also rejected the claim that investors selling off rental apartments would decrease the supply and thus increase rental prices in the short term.

The government has been working to increase the housing supply, he noted, which will help counteract this pressure.

Education Minister Naftali Bennett also voiced support for Kahlon Tuesday, stating on Twitter, “Finance Minister Kahlon took on a crucial national task in handling the crisis he inherited. We, as members of the government, need to back him and give him all the tools to succeed.”

Owners of three or more homes in Israel account for 30% to 50% of the country’s homes, or 206,000 rental units in total, according to data presented at an accounting conference this month.

The Finance Ministry counters that there are 650,000 rental units in the country, meaning owners of multiple apartments make up a small enough proportion of the market so that rents would not be pushed up.

“We’re talking about 50,000 apartments versus 700,000 renters. In other words, there’s no reason anyone should be raising rents,” Kahlon told TheMarker in an interview this month.

Political deal in the works?

Meanwhile, political sources speculate that Kahlon will compromises on reforms to communications company Bezeq and a plan to close the Broadcasting Authority in exchange for support for the proposed tax.

The tax has sparked opposition from MKs across the political spectrum, particularly in Prime Minister Benjamin Netanyahu’s Likud party. Political sources speculate that the opposition stems from the MKs’ interests and pressure from associates.

The tax is expected to be included as part of the Economic Arrangements Bill, which accompanies the budget.

Coalition chairman MK David Bitan stated that the proposal could not pass in its current form, as TheMarker reported last week.

Netanyahu apparently does not particularly like the proposed tax, and also apparently does not like the reform to Bezeq, which is controlled by his associate Shaul Elovitch. But he is believed to be likely to allow the tax to pass, with revisions, in order to enable the budget to be approved smoothly and ensure his term.

Political sources say that a deal is in the works to enable Kahlon to get the tax proposal passed with changes, and in exchange Kahlon will capitulate to Netanyahu and Bitan, and agree to forego the proposal to close the Israel Broadcasting Authority. The Bezeq reform is thought likely to be passed over as well.

Netanyahu reportedly called Bitan on Monday and asked him to halt his assault on the tax proposal.

Bitan responded on Monday that the negotiations on the various proposals are unrelated; Kahlon’s office stated that it is not willing to discuss compromises at the moment.

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