Days after Finance Minister Yair Lapid created a real estate brouhaha with a controversial plan to exempt some home buyers from the value-added tax, Prime Minister Benjamin Netanyahu is set to present his own proposals for tackling the problem of high home prices at a meeting of the housing cabinet on Monday.
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The core of the Netanyahu plan is to set target prices for new home construction by requiring contractors buying land from the government to sell the homes they build at a pre-determined price. Ministers will hear the proposal side-by-side with Lapid’s plan, which was unveiled last week, to exempt first-time buyers from paying VAT on new homes worth up to 1.6 million shekels ($460,000).
Lapid, Housing and Construction Minister Uri Ariel and Harel Locker, the director general of the Prime Minister’s Office, were trying on Sunday to reach agreement on a single plan before the meeting of the housing cabinet gets underway.
Lapid’s proposal has met with fierce opposition, including that of officials in his own ministry; Bank of Israel Governor Karnit Flug; and Prof. Eugene Kandel, the chairman of the National Economic Council. They prefer Netanyahu’s plan because it sets a maximum price for homes, while eliminating VAT only sets a minimum price, they explain.
In Netanyahu’s target price proposal the government would subsidize the price of the land for the developer in return for the latter committing to sell the homes built on it at the target price.
Ariel finally announced his opposition in principal to the Lapid plan on Sunday morning. Citing research conducted by the Housing Ministry, Ariel said that lowering VAT would not encompass a big enough segment of the market to have an impact on home prices across the aboard.
“In order to bring about a reduction in housing prices across the entire market, including second-hand apartments (which make up some 75% of the sales in the housing market), the model must apply to a significant amount of the annual sales of new homes. First-time home buyers represent only 8% of all annual sales, and the limitations set in the proposal, such as completion of military service, having at least one child, and age limits , disqualifies an additional portion of the public, which reduces even further the effect of the VAT plan on the housing market,” Ariel said in a statement.
Only by applying such a benefit to home owners who are buying larger, more expensive homes -- which according to Ariel is the biggest single group of home buyers (10% of all sales, along with first time buyers -- would create the required critical mass to influence housing prices. Despite that, sources close to Ariel said he had yet to decide how he would vote at Monday’s meeting.
The ministry’s research was seconded by Eldar Project Marketing, one of Israel’s biggest sellers of residential real estate, which said the 1.6 million-shekel cap on VAT exemption meant that virtually no homes would qualify.
Using data from the Central Bureau of Statistics and the Housing Ministry, Eldar said most homes being built today were too big and priced above the ceiling set by Lapid.
In cities like Holon, Kfar Sava, Ra'anana, Tel Aviv, Jerusalem, Rishon Letzion and Nes Tziona almost no four-room homes are being built to sell at 1.6 million shekels or less, and few three-room homes, which are more likely to be priced under the ceiling, are being built at all. In lower-priced towns, few four-room properties are being developed, with most contractors building homes of five rooms or more that are priced above 1.6 million shekels.
“Today we’re already hearing about couples who bought a second-hand home and are trying to get out of the contract in the hope that they can buy a new house after the exemption goes into effect,” said Roni Cohen, Eldar’s CEO. “If the exemption is approved in just a few months demand will explode only to find a few properties that meet the criteria for the exemption. Only very few couples will be able to enjoy the exemption while the rest will have to cope with higher prices.”
Netanyahu’s target price proposal received a wider range of reactions, with some building industry experts offering mild approval, but contractors rejecting it outright.
“The prime minster’s target price plan is a positive step that deals with the supply side, but the housing problem won’t be solved without a complete package of measures that incudes selling and developing a critical mass of land and dramatically cutting the bureaucracy in the sector,” said Shai Ezer, a real estate analyst at IBI Israel Brokerage & Investments.
Ezer said the target price would not bring about a quick reduction in home prices and may well lead to a drop in the standard of construction.
Ehud Hame’iri, a property assessor, said the main problem facing the housing market right now is the absence of sufficient land to develop housing in numbers that would meet demand. He proposed that the government’s Israel Lands Authority tender land three to five years before it is ready for development.
“Contractors will be able to participate in tenders with the target price set and the government can assume that prices won’t fall because [qualified] buyers will be able to buy an option to a home in projects that will be erected in a few more years, something that will calm the market and give buyers a horizon to solving their housing problems,” Hame’iri said.
Contractors themselves, however, expressed pessimism. Li Avisror, CEO of Avisror Moshe & Sons and chairman of Association of Contractors in the Negev and Be'er Sheva, said the target price plan was impractical. He suggested the government go back to its building-incentive program of the 1990s, during the wave of Russian immigration, when the state guaranteed to buy every home that was built. But he was also supportive of Lapid’s VAT exemption. “I think it’s the only way to immediately lower home prices for young couples,” he said.