Finance Minister Yair Lapid is proposing that young married couples with at least one child be exempt from value added tax when buying their first home. In order to be eligible for the tax break, at least one partner would have to have completed military service or national service.
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Lapid’s proposal, which technically would provide for a VAT refund, was presented Monday evening at a meeting at the Prime Minister’s Office. Prime Minister Benjamin Netanyahu has not yet decided whether to back Lapid’s plan or a competing one from Housing and Construction Minister Uri Ariel that would combine VAT breaks and a program of housing price targets. At the conclusion of the evening meeting, it was decided to reconvene next Monday in an effort to settle on a plan.
Some government officials question where the roughly 2 billion shekels ($576 million) a year in funding for Lapid’s proposal would come from. The plan, which only covers married couples, calls for VAT exemption on the home purchase for up to 1.6 million shekels (about $461,000). The VAT rate is currently 18%.
Buyers must also commit not to sell the home for at least five years and must also not be eligible for benefits under other government programs such as the Housing and Construction Ministry’s existing affordable housing program known by its Hebrew name Mehir Lemishtaken. The maximum of 1.6 million shekel purchase price on an eligible home is not considered final, Finance Ministry officials said, and will vary around the country based on prevailing home prices.
Lapid’s plan has encountered the opposition of a number of leading officials including National Economic Council Chairman Eugene Kandel and Bank of Israel Governor Karnit Flug.
Calling it a “fruitless plan,” Ariel also hinted that he would oppose the proposal in its current form since it is expected to benefit only 8% of home buyers. Officially, however, he expressed his support.
Treasury sources said the 1.6 million shekel ceiling was established to ensure that developers don’t hike their prices, thereby offsetting the program’s benefit. The figure was considered high, but the goal was to include Greater Tel Aviv, where prices are higher than most of the country, and to encourage contractors to build relatively small apartments in the Tel Aviv area that would meet the program’s criteria.
Housing Ministry officials said they proposed something similar nearly a year ago, but expressed concern that the approach will result in failure because three- and four-room apartments suitable for young couples will rise in price. The criteria for the program, the sources said, also clearly exclude the ultra-Orthodox and Arab populations, most of whom do not serve in the army or do national civilian service, and would probably not sustain High Court of Justice scrutiny.
Ariel’s plan would combine VAT breaks and price targets, and would also apply to broader segments of the population including homeowners who are trading up to more valuable homes, as well as couples without children.
Likud MK Miri Regev, chairwoman of the Internal Affairs and Environment Committee and a leading member of the Knesset’s housing caucus, praised Lapid’s proposal and took her Likud colleague Yuval Steinitz, Lapid’s predecessor as finance minister, to task for scuttling similar efforts.
But one senior Finance Ministry official called Lapid’s plan a sign of panic and a loss of direction. “Every junior economist knows that the solution to the housing shortage is increasing supply and not increasing demand,” he said.
The idea of scrapping VAT had come up a number of times at the ministry and has always been shot down by the professional staff, he noted. He cited the effects of a housing grant program in Jerusalem last year for first-time home buyers, which he said not only boosted the number of real-estate transactions but also the price of housing in the city.
There was also criticism from the real-estate sector itself. “Setting a 0% VAT rate on first-time home-buyers is a first step in the right direction, but it won’t have major significance when it comes to home prices without a substantial change in approach and substantially increasing the housing supply,” said Erez Cohen, former chairman of the Real Estate Appraisers Association. Nonetheless, he said, it is an important step.