Israel’s Market for New Housing Will Cool in Coming Months, Official Says

Potential buyers are waiting to see how steps like dropping VAT for young couples affect the market.

Tomer Appelbaum

The Housing and Construction Ministry expects a slowdown in residential construction and sales over the next few months as the government’s new policies take effect, the ministry’s director general told TheMarker on Tuesday.

Home buyers are now waiting to see how the new policies are implemented and affect the market, said the director general, Shlomo Ben-Eliyahu. He predicted that the slowdown would last about four months.

The most important new initiatives are Finance Minister Yair Lapid’s plan to eliminate the value-added tax on new homers bought by young couples and the “target-price” plan that would fix home prices in government land tenders.

Eliminating VAT needs Knesset approval, which would delay its going into effect for at least four months, Ben-Eliyahu said. The market has seen sharply rising prices, record mortgage applications and brisk sales.The government’s efforts are all aimed at reining in home prices, which have climbed by around 60% in real terms since 2008.

“I don’t see any damage being caused in the industry if there is a freeze for that period,” Ben-Eliyahu said. “We saw similar freezes for about the same length during the social-justice protests and the Trachtenberg committee. Nothing happened to the sector.”

Ben-Eliyahu was referring the protests that swept the country in the summer of 2011 over the high cost of living and the government panel that was formed to address the protesters’ grievances.

Housing Minister Uri Ariel has said the government is committed to the two programs, although to realize them the state will have to sell land zoned for between 10,000 and 15,000 new homes every year. Last year Israel had about 44,000 residential construction starts.

Ben-Eliayahu said the aim was to shift demand from the market for existing homes to new homes where the two programs will have a direct impact on prices.

“Today, about 75% of all homes that are bought are second-hand,” he said. “For us in the government it’s easier to influence buyers of new homes. We can’t influence the second-hand market at all.”

The VAT exemption would apply only to homes being built by contractors priced at 1.6 million shekels ($460,000) or less. The target-price program requires builders to commit to selling homes they build on land sold to them by the government at certain preset prices.

“The ministry believes that this will result in demand in the second-hand market diminishing significantly,” Ben-Eliyahu said. “It will force sellers to compromise on price and adjust them to prices in the new-home market.

He said a ministry team was studying ways to prevent contractors from abusing the program by raising prices or building smaller homes.

Ariel, meanwhile, said he disagreed with critics who say eliminating VAT will distort the housing market. “It’s not perfect and there are many problems, but they’re solvable,” he said. The tax authority will be the main player in addressing abuses.

“The discounts being granted in the program will not end up in the hands of contractors because we’re preparing price lists that will be adjusted for each neighborhood,” Ariel said. “These tables will serve as the basis for setting prices for the target-price program as well as for the VAT exemption.”

Ariel said that unlike the market for cottage cheese, which is dominated by three producers, the residential real estate market is truly competitive.

“I don’t accept the contention that everyone will engage in fraud,” he said. “Yes there will be contractors who raise prices to the 1.6-million-shekel ceiling, and in some places they’ll build smaller homes. But the market will determine this, and we intend to put into the market land for a lot of homes to ensure competition.”