Israel’s Housing Cabinet Approves VAT Exemption for Some Home Buyers

The panel also okays a number of measures designed to put a lid on the country's climbing apartment prices.

The housing cabinet on Monday unanimously approved both a plan to exempt some home purchases from the value-added tax and a proposal to lower prices for homes built on land sold by the government.

The two steps were approved as ministers also backed a host of measures aimed at putting a lid on housing prices that have risen by some 65% in the past four years.

Finance Minister Yair Lapid, who proposed the VAT-exemption plan a week ago, defended the step against a wave of criticism that it would further spur demand for homes and raise prices.

“We have a problem of market confidence. Real estate of a market of expectations,” he said at the opening of the deliberations. “But we’ve seen that the market is reacting and that the public believes in the program.”

Under the plan, first-time home buyers meeting criteria such as past army service will be exempt from the 18% VAT charged on new homes priced at 1.6 million shekels ($460,000) or less.

The target-price plan, which has the backing of Prime Minister Benjamin Netanyahu, will offer contractors discounted prices on government-owned land they buy if they offer the homes they build at lower prices.

Housing and Construction Minster Uri Ariel said on Monday the target-price plan would reduce home prices by 20%. But he warned that the VAT exemption and target-price plan were “bridging” solutions until better, long-term solutions could be put in place.

The following are some other measures the housing cabinet approved Monday.

* A committee was charged with writing a bill within 60 days that would provide protection for tenants of rental apartments.

* Local authorities will receive incentives to approve residential construction. The measure is aimed at many towns’ preference for commercial and office development, which generates more tax revenue and requires municipalities to provide fewer services.

* Owners of second homes will be required to file with the tax authorities, a move aimed at discouraging property speculation.

* The housing cabinet also pledged to foster so-called umbrella agreements under which the government provides infrastructure and public services in towns where large housing tracts are being developed.

The government has been scrambling to cool an overheated housing market. Although housing starts have been rising, they have not caught up with demand while low interest rates have encouraged people to take out mortgages.

While the government has taken measures to ease prices over the long run, pressure had grown on Lapid and other politicians to speed this process up.

Despite the unanimous votes in favor, both the VAT and target-price programs came under criticism in general and for the particulars.

The chief critic was Bank of Israel Governor Karnit Flug, who threw her support behind the target-price program, saying it would help increase the housing stock, which she – like most economists and policy makers – has said is the key to easing home prices.

But she slammed the VAT exemption, saying it would increase demand rather than supply and create a regulatory headache as officials try to monitor prices to enforce the terms of the exemption.

“Enacting the program will increase demand for new homes. The more demand is inelastic – and in the short term it will be inelastic – there will be pressure on prices,” she said. “In the absence of price supervision, a large part of the benefits will not be enjoyed by home buyers.”

Environmental Protection Minister Amir Peretz said he backed the exemption but said the country’s outskirts should enjoy a full VAT holiday on new homes while buyers in the center should only qualify for a VAT reduction.

Echoing the views of other critics, he said the lower price of homes in the periphery – the Negev and Galilee regions – meant that home buyers there would be saving less on their purchases in shekel terms than those in the center.

“The State of Israel doesn’t need to be entirely urban. Do we need want everyone living between Gadera and Hadera?” he asked, referring to the towns traditionally cited as top and bottom of the country’s center. He called for the housing cabinet to seek ways to increase the public-housing stock at its next meeting.

Flug and the Affordable Housing Coalition both warned of the fiscal impact of the VAT exemption, which the treasury estimates would cost the government some 3 billion shekels in lost tax revenues annually.

The coalition said it was concerned that the government would be forced to raise other taxes or cut programs that help Israel’s poorest. It also expressed concerns that the buyers mostly likely to benefit from the exemption are purchasing groups, which generally comprise better-off families.