Finance Minister Yair Lapid’s proposal to exempt young couples from value-added tax on the purchase of their first home has unleashed a storm of debate over whether it will help address the high cost of housing or instead actually boost demand and intensify price pressures.
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The plan will require legislation, and many details have yet to be ironed out. In any event, it will not apply to secondhand homes, because VAT – which is currently at 18% – is only charged on new construction. The plan moved one step forward this week with its approval, in principle, by the ministerial committee on housing, but it has not found major backing among economists.
However, Erez Cohen – a real estate appraiser, economist and partner in the firm Barak, Freidman, Cohen & Partners – says Lapid’s plan may well lower housing prices. He says that although the plan will boost demand for new construction among first-time home buyers, it will reduce demand among current homeowners seeking to trade up to better housing, because they will have a hard time unloading their current homes – which are not included in the plan because they aren’t new construction.
Furthermore, Cohen contends, those current homeowners who insist on selling will have to do so at reduced prices. That in turn will make them attractive to young couples, who may opt to buy a secondhand home rather than a VAT-free new one.
In the real estate industry, some also welcomed Lapid’s plan, saying it would boost demand. But others thought it would usher in an industry slowdown. Among the critics of the plan is Eran Rolls, chairman of the Israel Building Center, who says it would only increase prices. “There is currently a shortage of tens of thousands of apartments in Israel in the 650,000 shekel to one million shekel price category [$186,300 to $286,700],” he says, “apartments geared for purchase by the middle class.”
The prevailing price levels at the moment, he adds, are mostly the product of a deliberate move on the state’s part to limit the supply of cheap apartments. But on the other hand, there is inelastic, brisk demand. “The contractors and developers will do what they have to do as business people who are obligated to produce the best return possible, and they will raise apartment prices. It’s the most basic rule of supply and demand.”
Dan Parnas, CEO of Carasso Real Estate, says one advantage of Lapid’s VAT exemption plan is that its effect will be felt immediately. “It’s a targeted benefit that undoubtedly will help the market segment of young couples whom the government is interested in assisting.” But, he added, overall it could contribute to increases in housing prices by boosting demand.
One of the owners of Peri Real Estate, Eldad Peri, says the government needs to take additional steps if the plan is to be successful, and ensure that it doesn’t simply become a chance for first-time home buyers who have the money for a down payment to buy an apartment VAT-free and rent it out.
“Substantially addressing the issue of the down payment on the purchase of an apartment could be an immediate complementary solution to the proposals being considered now, whether through state guarantees or reducing the requirement for a 25% down payment,” he says.
Lior Ayalon, president of the Objective Mortgage division of the Davidoff Group, praises the target price program, another proposal that got the ministerial housing committee’s backing this week. That plan calls for developers to bid on state-owned land that would be sold to them at reduced prices, on the condition that they build housing on the land at lower than market prices.
Calling it a first attempt at lowering housing prices by dealing with supply, he said it would encourage builders to construct new housing and have the homeowner get the benefits indirectly. “Of course, the working assumption here is that the contractors will actually pass the benefit on to members of the public,” Ayalon adds.
Cohen says Lapid’s VAT exemption plan should actually be seen as an 18% state subsidy on new construction for those who qualify. “By the same token, it would have been possible to provide a subsidy of 15% or any other rate.”
There has been some criticism of Lapid’s initial plan, in which qualifying homebuyers were required to have done military or national civilian service. This would effectively exclude most Israeli Arabs and ultra-Orthodox Jews, who don’t generally perform such service.
In fact, Attorney General Yehuda Weinstein challenged the legality of this aspect of the proposal. The final requirements of the program have not yet been worked out.
Cohen, however, argues that every government has its priorities. “There are benefits given to residents of problematic border areas. There are benefits to the elderly. There are benefits for Bedouin army veterans, new immigrants, and many other examples of sectorial benefits,” he says. “This time, what is being proposed is a benefit for working army veterans who don’t own a home.
“Because it involves a subsidy, the economists – who prefer market-based solutions to government intervention – are opposed,” Cohen adds. “But economists consider policy through an economic perspective and sometimes ignore other needs, while policy needs to be set by the leaders and not by economists – and that includes the subject of the cost of housing.”
“The most desirable economic solution,” Cohen believes, “would be to reduce housing prices on the open market. Real steps are being taken to increase supply and curb demand. The impact of these steps will take a number of years before it is felt, and, even then, the reduction will not be drastic.
“From the standpoint of policy makers,” he notes, “the problem is not only the price of housing but firstly the ability of young families to buy a home. The number of monthly salaries needed to buy a home can be reduced if the cost of homes is made cheaper, or if salaries are increased. Another way to improve the capacity to buy a home is by providing a subsidy.”
As currently written, Lapid’s plan would only apply to homes costing up to 1.6 million shekels. As a result, Cohen says, although increased demand among qualifying buyers may increase prices slightly in general, a drop in prices for apartments that currently sell for about 1.7 million shekels can also be expected.
“Contractors will lower the prices of those apartments to the 1.6 million shekel maximum,” he says, predicting that activity on the secondhand apartment market – not included in the plan – will be majorly curbed. “Potential home buyers will prefer to buy [new units] from contractors to benefit from the program while sellers [of secondhand homes] won’t be in any hurry to lower prices because they won’t be entitled to a [VAT exemption] on their replacement home, and therefore won’t be able to forgo the money generated from the sale of their home.”
“Homeowners who are unwilling to sell cheaply also won’t be able to trade up to more expensive homes, which will also lower demand for more expensive homes – thereby having an additional positive effect in lowering home prices on the open market,” forecasts Cohen. “Maybe the plan isn’t so bad. It deals with its target population in the short-term, and in the long-term complements other efforts to reduce housing prices.”
Avner Levy, who chairs the Tel Aviv-Jaffa and Bat Yam contractors and builders association, also welcomed Lapid’s plan. “This is the first time the government has been prepared to dig deep into its pockets and forgo a substantial amount of tax revenue to make things easier for Israeli citizens to buy a first home,” he says. “Up to now, the Finance Ministry had refrained from giving up VAT because it is a substantial source of state revenue. This is just a first important step, that should be accompanied by other complementary steps aimed at lowering the price of homes and land.”
MK Itzik Shmuli (Labor), who was a leader of the social justice and cost-of-living protests of 2011, says the ministerial housing committee’s plan reflected a realization of the fact that solving the housing problem requires more aggressive government involvement. “But the real test,” he adds, “will be in its implementation. And in this regard, the ministers’ inclination to try and make headlines even before a plan is ready is disturbing. It’s important to emphasize that government paralysis when it comes to supply is a cause for concern, in light of the wave of demand that it’s expected to ignite. And if they don’t start building at a furious pace, prices will continue to go sky high.”