Red Tape, Tax Breaks Behind 53-percent Jump in Home Prices

Taub Center says market fails to respond adequately to increases in demand and prices.

Raz Smolsky
Raz Smolsky
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There's an increasing presence of illicit money in Israel's real estate industry.
There's an increasing presence of illicit money in Israel's real estate industry.Credit: Nimrod Glickman
Raz Smolsky
Raz Smolsky

Israeli home prices soared 53 percent after inflation between 2007 and 2013, the Taub Center for Social Policy Studies said in a report released yesterday. It attributed the dramatic increase to growing demand fueled by low interest rates and tax breaks - as well as crushing bureaucracy.

The fact that most Israelis live in condominiums complicates urban renewal by parceling out rights in buildings to multiple homeowners, according to the report, which was part of the center’s annual State of the Nation report.

"A steep decline in interest rates due to the global economic crisis, combined with capital market taxation practices that created a comparative advantage for real estate investment, led to a sharp rise in the demand for housing," wrote Noam Gruber, who authored the report’s chapter on the housing market.

"Rigid systemic barriers kept the housing supply from increasing in a manner commensurate with demand, resulting in competition between investors and young households for the limited supply of new residences," he said.

The extent of Israel's bureaucracy is such that the real estate market is less able to respond to increases in prices and demand than most other Western countries. Thus, every 1-percent increase in home prices led to just a 0.38-percent increase in supply, the report said. That compared with an average of 0.65-percent for 21 developed economies covered in the report.

The report said that it took on average 13 years for a residential building to be completed in Israel - two of them on actual construction and the other 11 on planning and issuing licenses. Approvals from regional planning committees typically take five years and those from local committees another three years, the report said.

In spite of the sharp rise in home prices, the rate of home ownership remains high in Israel. The percentage of households that didn’t own a home dropped to 26.5 percent in 2012, the last year for which there are figures, from 27.7 percent six years earlier, the report said.

The number of households owning two or more homes grew almost four-fold to 8.1 percent from 2.1 percent, a rise that was especially prominent after 2006. The increase reflects the attractiveness of buying homes as an investment over the stock market and other investments, the report said.

But rental costs also rose between 2008 and 2011, hurting the youngest and elderly sectors of the population who are most likely to rent. Their disposable income declined 5 percent in those years as they spent more and more on rent, the Taub Center estimated.

"If this trend within the young-household population continues, it could well have a long-term negative impact on Israeli homeownership rates," the report warned, noting that a disproportionate amount of residential real estate wealth was in the hands of the older generation.

The short-term solution is to make residential real estate investment less attractive, according to the report. Right now, only income in excess of 5,080 shekels ($1,300) a month is liable for taxation. But with the average rent in Israel just 2,500 shekels, most landlords pay little or nothing on the approximately 640,000 rented units across the country.

The Taub Center recommends that rents be taxed at a rate of at least 25 percent, equivalent to the capital gains tax charged on securities investments.

Long-term, the report recommended that planning and approval processes be simplified and decentralized and that the building infrastructure for new housing be given to local authorities. The sale of apartment buildings should be based on a supermajority of the tenants, rather than the National Outline Plan 38, known as Tama 38 in Hebrew.

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