How do people buy property for investment in Israel? Usually, using “black money” – undeclared income that they’re laundering by buying apartments for investment, according to the Tax Authority. No small amount of that money goes to paying workers under the table: An economist reports that even though the Israeli construction industry has lost about 20,000 “wet workers” going by their tax statements, or 40% of the workforce, the pace of construction hasn’t changed. As that can’t be, clearly, there’s a lot of work being done off the books.
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Top tax officials admit they’re well aware that vast sums get smuggled into the country and are subsequently laundered through real-estate transactions. Many billions of shekels have been sneaked into the property market this way, and this inundation of “black money” is one of the factors behind the jump in housing prices.
The study by the revenues office at the Tax Authority found that between July 2012 and July 2014 about 50,000 dwellings were bought for investment purposes (i.e., not to live in). Of those, 30,000 were bought by 27,000 buyers.
When the tax people looked at the income of the households buying these dwellings for investment, they found that in 18% of the cases they grossed no more than 7,000 shekels a month (about $1,950).
Now remember, these are dwellings bought for investment, which means the buyers already own one home. So how can households grossing 7,000 shekels a month buy a second home? They cannot. Ergo, that 7,000 shekels is just a fraction of what the household is making, but the rest is going unreported. Or alternatively, the household is fronting for the real buyer, who has his own reasons for staying undercover and not being registered as the home’s owner.
A similar study of property buyers from 2003 to 2012, also by the Tax Authority, found that of the 136,135 apartments bought for investment, nearly 20% were bought by people grossing no more than 7,000 shekels a month. In fact, their average monthly income was 4,093 shekels ($1,132), while the average apartment they bought cost 828,295 shekels (about $230,000).
Ostensibly the two studies produced the same result, but there is a big difference between them: The households made much the same; but housing cost much, much more in 2012-2014 compared with 2003-2012, which means, the Tax Authority concluded, that the problem of illicit money being laundered through the property market has grown much worse.
The bottom line: Tens of billions of shekels in undeclared income are flooding into the Israeli housing market each year. This “black money” is one of the reasons Israeli housing prices are so extraordinarily high.
Rich man, poor man, same house
People declaring that they earn a thousand dollars a month who buy penthouses are an extreme case; but even people who gross 20,000 shekels a month can’t afford to buy a first home – let alone a second one – so easily. The Tax Authority study found that 51% of households that buy dwellings for investment gross exactly that – up to 20,000 shekels a month. The inescapable conclusion is that the real estate market is largely shaped by the shadow economy.
So what sort of dwellings are “poor” investors buying? The average price of an apartment bought for investment by people grossing up to 7,000 shekels reached a million shekels. People grossing between 15,000 and 20,000 shekels a month bought apartments worth up to 1.15 million shekels.
In other words, while the second group of investors earned more than double the first group, the difference between the flats they’re buying is just 16%. And if we continue up the pay ladder, we find that households grossing 35,000 to 40,000 shekels a month – which can afford to buy housing based on declared income – were buying housing that cost 1.44 million shekels. They were earning 500% more than “poor” investors, yet the dwellings bought for investment by the wealthier earners were just 45% costlier.
Yet again, that bolsters the suspicion that the “poor” buyers are basing their purchases on undeclared income.
Here’s another intriguing statistic: The combined value of dwellings bought for investment by low earners over the past two years is 4.7 billion shekels, which is 14% of all dwellings sold for investment in that time (to individuals), says the Tax Authority study.
If we factor in the higher earners, up to 20,000 shekels a month, whose purchases also seem to involve a healthy factor of undeclared income – we reach a total of 14.4 billion shekels.
The findings are dreadful news from every perspective – legal, ethical, the tremendous loss of tax revenues to the state, and the effect on people who don’t make money under the table yet have to compete in the same market.
A subtextual reason for the way “black money” is jacking up housing prices is that money-launderers are less likely to haggle over the price of the dwelling. Yet the upshot is that in the market as a whole, housing costs more, to the detriment of law-abiding young couples trying to buy their first home.
He said, she said, the Palestinian Authority said
Not only are these “poor” households buying housing for the same prices as the middle class, says Dr. Avichai Snir of the Netanya Academic College – they’re evidently doing so without taking mortgages, because the bank wouldn’t dream of making mortgage loans to people who earn (on paper) so little. So the various moves the Bank of Israel has been making to constrain mortgage lending don’t bother them at all, Snir concludes.
Also, anybody wily enough to hide enough income to buy a second home, is wily enough to hide the income he’ll get from renting out that second home, Snir adds.
A month and a half ago, Snir participated in a meeting of the Knesset Finance Committee subcommittee on money-laundering. The whole meeting was devoted to undeclared income fueling the housing market. Participants included Knesset members, Tax Authority and Bank of Israel officials, representatives of the Bonei Haaretz builders union, accountants, auditors and more.
Most countries accept that their property markets are riddled with undeclared income, including in respect to labor. Turkish construction workers in Germany and Bulgarian ones in Italy are often paid under the table, for instance, Snir told his colleagues.
“In Israel, if you want to understand how much undeclared money goes to labor, look at the market for wet workers [plasterers, tillers, various finishing jobbers, that sort of thing]. They constitute 35% of the labor force building each dwelling. Without them there’s nothing. Yet from 2007 to 2012, ostensibly the number of wet workers diminished by 40%, yet the time it takes to finish building an apartment project has remained the same – about 24 months. How can that be? With 40% fewer workers, which is 20,000 people, how can the duration of construction not change?”
Snir cross-checked with the number of Palestinian workers officially employed in construction in Israel and the occupied territories. He found that according to official Israeli figures, there are 60,000 Palestinian workers in Israel and 20,000 in the West Bank. Official Palestinian figures say over 100,000 Palestinians work in construction in Israel.
Meanwhile, the pace of construction in Israel hasn’t slowed, though going by the official figures, the workforce shrank sizably. Snir did the math and concluded that 20,000 Palestinians are working off the books, costing about 1.5 billion shekels a year.
From the snowy Alps to the banks of Tel Aviv
Israelis working off-books are one thing; foreign residents are another. If once they were ascribed romantic reasons for buying dwellings in Israel, or at least they were considered to be fleeing anti-Semitism, a sober look today shows a lot of them are laundering ill-gotten gains.
Following a leak of information from Swiss banks to the American and French tax authorities, people with dodgy money began pulling it out of Switzerland – and some of that money reached the Israeli property market, according to a variety of sources. How much came is anybody’s guess, says Snir, but whispers put the amount at 8-9 billion shekels. The money was apparently transferred to Israeli banks, which quickly got itchy and advised their new clients that if the money stayed, they – the banks – would have to report it to the foreign authorities, and urged their new clients to move that money elsewhere, pronto, Snir explains.
Tamar Waldman, assistant legal adviser to the attorney general on money-laundering, says most of the ill-gotten gains spent on housing is made in Israel, but people do transfer undeclared income abroad to Israel, and some get caught trying to smuggle in cash. When asked what they meant to do with the money, some openly admit they meant to buy housing, she says.
In short, a lot of the money being used here by foreign investors isn’t kosher, sums up Lior Tabori, economic adviser to the finance minister, and hints that Israel has been turning a blind eye to the issue.
“Most nonresident investors are Jews. Israel needs to decide whether we want this money or not,” says Tabori. “On the one hand, suggestions are raised to fine them; on the other, we protect them in every way possible. When they bring money here, we don’t tell their countries of origin. We invite them to come and deposit the money here. They don’t have to report a thing. It’s time Israel made a decision if this is desirable or not.”
It is true that privacy is an issue when exchanging information with another country, Tabori acknowledges.
How people make money off-books
In Israel, money-laundering has been burgeoning because of organized crime and falsified invoices, which inflate the price of a given service or product in order to “explain” the existence of money. Crime gangs particularly like to launder their ill-gotten gains through property deals, says Snir: You put the money into housing, which you later sell for “clean money.” You can do it again and again. It’s easy.
He also connects between crime gangs and “poor” investors, of whom at least some are front men. In 2013, 6 percent of the “tax snitch” messages that the Tax Authority handed over to the police were about property deals, some of which involved transactions with relatives of organized criminals, Waldman told the committee.
One way to fight these things are to impose a disclosure duty on lawyers and accountants, Tabori suggests.
So much is known, the evidence is out there – yet this highest-ranking of Knesset subcommittee meetings didn’t go particularly well. Everybody agreed that to tackle the problem properly, the Tax Authority needs at least hundreds more workers. There are also problems with the authority’s legal limits to exposing transactions involving undeclared income. The problems are known. The question is what to do about them.