Analysis

Court Ruling Threatens New Era of Soaring Israeli Home Prices

Analysts say tax on multiple-home owners won’t survive repeat vote in the Knesset - and if it goes down, prices will go up

A new neighborhood in Lod.
Tomer Appelbaum

Israel’s real estate sector was all aflutter on Wednesday over the question of whether the High Court of Justice would order the law taxing homeowners with three or more houses to be sent back to the Knesset Finance Committee for another vote – a move that political observers said would all but doom the law.

If that happens, the consensus among people in the property market is that investments in residential properties will spike and and as a result, home prices will rise.

“The High Court has succeeded tripping up Kahlon. At the start of the year we had expected prices to steady in 2017 and for a change of direction to take hold in 2018. But the High Court has altered everything,” said Yaniv Hevron, chief economist at the investment house Excellence.

The law itself deserves a lot of the criticism it garnered when it was proposed by Finance Minister Moshe Kahlon. It’s complicated, cumbersome, difficult to understand and imposed the tax burden inequitably. It was structured in such a way that those owning the most expensive investment properties would pay relatively little tax.

Yet in spite of all these problems, real estate experts pretty much all agree that the law has played a major role in cooling demand in Israel’s red hot housing market in recent months. Without it, the government will be hard pressed to come up with an alternative way of stemming the rise in home prices.

If you look at the trends in the housing market when the law was being legislated – from the time the cabinet approved it last August, to the deliberations in the Knesset Finance Committee, to its final votes in the plenum, up through today – you can’t help but see its impact. That is even more obvious in the way it depressed demand from housing investors and the upsurge of home selling by them.

Both the decline in purchases and the increase in sales by investors are among the key factors in bringing a halt to the two-year climb in home prices that began with the abortive plan by Kahlon’s predecessor, Yair Lapid, to exempt many home buyers from the value-added tax. Prices haven’t fallen but over the last several months they have stabilized. It’s for that reason that a High Court ruling against it could quickly wreak havoc on the market.

There are many indices purporting to show how the housing market is behaving, but one of the best is the net purchases of home by investors. It’s a figure that can be easily obtained by the statistician and it’s updated every month. It subtracts all the homes that were sold by investors from the number they bought.

Housebroken Net purchases of homes by investors

A positive index means investors have been net buyers and a negative one shows they were net sellers and are freeing up properties for people buying them to live in.

Over most of the last decade, the monthly index was positive, most of the time to the tune of 500 to 1,200 units. The quarterly average was 2,500. Even when Lapid’s Zero-VAT plan caused buyers to wait to make a purchase in the hopes of enjoying the tax benefit, investors remained enthusiastic buyers.

Change began under Kahlon in 2015

The first change in investor behavior occurred in the middle of 2015, when Kahlon raised the purchase tax on houses bought for investment. The index hovered around the zero line.

However, since the summer of 2016, when the Kahlon proposal to tax multiple-home owners began to gather momentum, the index dropped down into negative territory – in other words, investors began unloading their properties.

In the last quarter of 2016, they were net sellers of 1,600 units, and in the first two months of 2017 they were selling on average of 800 more units than they were buying. As a result, the treasury’s chief economist found that investors’ share of the housing market was falling from 25%-30% of all purchases to as little as 15% in recent months.

The multiple-home owners tax wasn’t the only factor behind this sea change. Rising mortgage rates also deterred investors, as did the purchase-tax hike. In addition, there’s Kahlon’s Machir L’Mishtaken program, which has put tens of thousands of units on the market that investors are barred from buying.

Nevertheless, many in the property business say the loss of the multiple-home owners tax will strike a serious blow against the steadying of the Israeli housing market at a time when it has just stared to have its intended effect.

Nir Shmuel, CEO of Shnir, a residential-property marketing company, says if the court sends the law back to the Knesset, investors will be back, too. “I expect that in the coming days investors who had been sitting on the fence and debating whether to buy another house will go ahead and do it.”

The supply-demand imbalance will be worse than usual because the number of homes being sold outside the framework of Machir L’Mishtaken has shrunk, Shmuel said.

“Right now, the odds of the public returning to the housing market en masse and a renewed rise in home prices have increased immensely, just as they did when Zero-VAT was buried and elections were called,” says Excellence’s Hevron.