Finance Minister Yair Lapid promised to exempt the purchase of a first home from value-added tax, subject to certain contingencies. But his bill, the so-called “zero-VAT law,” didn’t make it through the Knesset before it went on summer recess. Buyers hoping for a great deal will have to wait until October, which is when MKs reconvene for the winter session – and even then, there’s no telling if the law will pass or get shot down.
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Should buyers wait for the law, or not? There are actually a lot of parameters involved in this decision. VAT is currently 18%. Buyers could save as much as (almost) 250,000 shekels ($73,000) at the top end of the tax break. But not every apartment will be eligible, not every buyer, and there’s no telling how much further housing prices could climb before the law comes into force.
Here are eight parameters to consider.
1. Your equity: The poor need the break more
The first criteria is how much equity you need to fork over for a home. The smaller the amount, the more the VAT break will mean to you, and the more it would pay to wait.
Take a couple that has a small sum – say, 200,000 shekels. With a big mortgage (75%), they could buy an apartment for 800,000 shekels. You won’t find homes for that price anywhere in central Israel, from Ashdod to Hadera. But with the tax break, you could get a home for 950,000 shekels, which is a slightly different story.
If your equity is 375,000 shekels and you get a 75% mortgage, you could buy a home for 1.5 million shekels. The tax break will lift you to 1.7 million – but that’s beyond the criteria of the proposed “zero-VAT” bill, which caps at homes worth 1.6 million shekels. So the law is meaningless to you.
2. Will housing prices rise any more?
Waiting for the law to take effect could bear other costs – for instance, if housing prices continue to rise.
In the Talmei Menashe neighborhood of Be’er Yaakov, in central Israel, at the start of 2014 apartments averaged 1.48 million shekels. Now it’s 1.52 million. If housing there continues to appreciate at a rate of 45,000 shekels over six months, buyers will lose out.
Some apartments on the brink of costing 1.6 million shekels will probably go over that threshold, costing their buyers the tax break.
In May this year, two 5-room apartments were sold, one for 1.6 million shekels (outside the law in a few months) and one for 1.58 million (on the brink). Most 4-room apartments there are still below the threshold – but if housing prices continue to increase, they won’t be.
So will housing prices keep rising? Who knows. Ohad Danos, chairman of the Land Appraisers’ Association, doesn’t think they will in coming months because of Operation Protective Edge and its economic ramifications. “It will take the public mood some time to recover,” he projects.
Moti Wizel, director of the VCELL research institute and strategic consultancy, doesn’t see an increase either. First, people have to digest the new law, he says. “It will take the market three months to understand it and its complicated rules,” he says. “But by mid-October, after the war and the holidays and with school back in session, people will start buying again.” He predicts heavy buying in the final quarter of the year, which doesn’t necessarily mean that prices will increase any more.
3. How much is the break worth? Up to 240,000 shekels
Danos estimates that, at most, the tax break will be worth nearly a quarter-million shekels, but that’s a discount from the very high level that Israeli housing prices have reached. “It’s like a supermarket giving a discount after raising prices,” he says.
VAT may be 18%, but calculating the discount isn’t as simple as 18% of the price on the seller’s website. That’s because housing prices as presented include VAT already, so just deducting 18% from the housing prices means you’re also deducting 18% of the VAT, which isn’t how it’s done.
An apartment costing 1.2 million shekels + 18% VAT comes to 1.416 million, for instance. The VAT element is 216,000 and that’s the size of the break.
Let’s make this simple. On an apartment costing 1.6 million shekels, the VAT break will be 240,000 shekels.
On an apartment costing 1.5 million shekels, the VAT break will be 225,000 shekels.
On an apartment costing 1.4 million shekels, the VAT break will be 210,000 shekels; if the flat costs 1.3 million shekels, the break will be 195,000.
If the flat costs 1.2 million shekels, the break will be 180,000; if it costs 1.1 million shekels, the break will amount to 165,000. And if the apartment costs a million shekels, the break will save you 150,000 shekels.
4. The supply: Not many apartments, and mainly on low stories
How many apartments are likely to fall within the categories of the “zero-VAT” law? Simply, these are all the new apartments costing less than 1.6 million shekels. But note that inclusion isn’t automatic. To prevent contractors from fiddling, eligibility will be determined by a government assessor, based on the average cost of housing in the area. A buyer of a new home whose price exceeds the area’s norm won’t get the tax break, even if it costs less than 1.6 million shekels.
The trouble is that it neglects issues that affect price – such as the floor the apartment is on. The higher the story, the higher the cost of the apartment. It is, therefore, reasonable to assume that eligible apartments will be on lower stories.
The bottom line is there’s no telling how many eligible apartments will be available in October. A survey by research company BDI Coface among the 25 biggest contracting companies found 3,000 apartments costing up to 1.6 million shekels, while the Bonei Haaretz society estimated the figure at 4,000.
Danos points out another snag: Builders are scaling back because of the uncertainty, reducing the number of new housing units in general, and eligible ones in particular. Since Lapid announced his VAT plan, requests for building permits sank by nearly a third, he says. Builders in the middle of projects want to finish, but they aren’t starting new ones.
5. Personal preferences
There will evidently be no eligible housing in the greater Tel Aviv area, nor in Nes Tziona or Netanya, aside from a few 2-room apartments in south Tel Aviv or Ramat Gan. But those are rare. People may not find the homes they want size-wise, or by location either; if you want the break, get used to commuting. Or to living in a box.
6. The market for new homes
Another parameter gumming up calculations is the behavior of contractors today. As sales collapsed, they’re being nicer to buyers. “The market today is an opportunity: contractors are willing to compromise, to give discounts,” Wizel assesses. Maybe 5% or 6%, for instance. That’s good, but not as good as a break on VAT. It’s your call whether to take that gamble.
7. The used-home market
Buyers should look at the secondhand home market, suggests Wizel, where prices are likely to drop as the law comes into effect. In contrast to the law, the decrease in price won’t be contingent on age, army service, price or anything else. One might want to wait for October in order to troll for a cheaper used flat, he suggests.
If you’re selling, Wizel suggests you compromise a little now rather than a lot in October.
8. What’s the chance of the law being enacted sooner?
The only certainty is that we can’t be certain whether the “zero VAT” law will be enacted at all, let alone sooner.
Also, the Housing committee conditioned the gala land-sale for housing on the zero-VAT law coming into force. Therefore, the question marks are big ones.
Economists have generally howled against the zero-VAT proposal – from Bank of Israel Governor Karnit Flug to the former chief economist at the Finance Ministry, Michael Sarel, who predicts it will boomerang, acting to increase housing prices, not lower them. But at the end of the day, the question of the law’s passage is political.
Therefore, the fact that Lapid failed to push it through the pre-summer Knesset does not augur well. Its chances are no better in the winter session than in the spring one. If anything, the law is less likely to pass. A coalition crisis or budget brawl following Operation Protective Edge could mortally hurt the proposal.
Lapid has been accusing the ultra-Orthodox parties (and Labor) of torpedoing his proposal. But the truth is that the coalition members, especially Habayit Hayehudi, embittered his life just as much. Knesset Finance Committee chairman Nissan Slomiansky held up the bill by a critical two weeks, enabling the Haredim to foil its passage through filibustering. Last Wednesday, Housing and Construction Minister Uri Ariel vowed that the Knesset would convene during the break to complete the legislation, but it hasn’t happened as yet. At this stage, the “zero-VAT” bill’s passage into law is not inevitable.