Navigating the Maze of Kahlon’s Housing Reform

Real-estate insiders can’t comprehend the many and often contradictory reforms the finance minister-designate envisions for the housing market.

Reuters

The real estate sector is all aflutter with reports of ambitious plans by Moshe Kahlon, the finance minster-designate, to shake up the sector with a host of reforms designed to lower home prices and increase the housing stock.

But while the plans, as spelled out Kulanu’s coalition agreement with Prime Minister Benjamin Netanyahu’s Likud party, are often quite specific and involve some of the most obscure and intricate components of Israel’s sprawling and complicated property and construction market, the prevailing sentiment in the real-estate sector can be summed up in one word: confusion.

Indeed, the housing market is looking much like the weeks and months after Yair Lapid, Kahlon’s predecessor in the finance portfolio, announced plans to exempt many buyers of new homes from the 18% value-added tax. Anticipation caused buyers to freeze their plans and builders to halt construction while they waited for zero-VAT to go into effect, wreaking havoc across the property sector before the proposal was abandoned.

One possible explanation for the confusion is the number of people close to Kahlon who have been bragging that they were the ones who drafted the housing platform. In fact, many had a hand in its writing and many more helped by providing advice.

The result is a core plan surrounded by a hodgepodge of other ideas, some of which appear not to have been fully thought through. One thing, however, is clear: The plan is complex and will be complicated to put into effect – and that will take time.

The manner in which the plan was developed gives the impression that Kahlon and his colleagues have not yet decided on exactly how they intend to approach their goal of bringing down housing prices by increasing supply.

Some of those with whom TheMarker spoke said they sensed that Kahlon & Co. lacked a complete mastery of the subject. Others spoke of the plan’s general targets and the difficulty in seeing how they will be implemented. In any event, most of the sources were of the view that even if many of the initial elements of the plan are put into practice right after Kahlon becomes finance minister next week, it will take a long time before they work their magic of lowering housing prices.

A version of the plan, a document entitled “Synopsis of the Work Plan to Reduce the Cost of Homes,” which was made part of Kulanu’s coalition agreement with Likud, has six sections addressing the subjects of government-owned and privately owned land, developing more public housing and rental apartments, eliminating impediments in urban renewal projects and reducing construction costs.

The starring player in almost all these plans, however, is the Israel Land Authority, which administers the government’s near-monopoly on land and whom nearly everyone points to as the culprit for inflating home prices. Previous governments had sought to deprive the ILA of some of its powers, but their success was very limited.

Kahlon hopes to do an end run around the powerful government agency by taking the ILA’s land and redistributing it to other agencies. The Jewish National Fund (Keren Kayemeth LeIsrael) would market its own land to builders rather than having the ILA do it. The Dira Lehaskir rental housing agency, which was set up by Lapid to identify and plan for the use of land designated for rental housing, would get to deal with its own land, too. And the assets of the government’s Development Authority, which oversees abandoned Palestinian land from the period of Israel’s War of Independence, would be managed by Amidar, the government housing company.

When the dust clears, the ILA would be left with only a portion of the land that it currently administers.

That puts a new spin on the most prominent of the operative steps in the plan, namely that all of the public tenders of state land must without exception be done in the framework of the government’s Mehir Lemishtaken (“price for new residents”) affordable housing program and that 80% of the homes built on it will be reserved for first-time home buyers. Through Mehir Lemishtaken, the government sets the price of the land and conducts a reverse auction where contractors bid the lowest price they think they can manage for the homes they construct on it on a per-square meter basis.

Ultimately, however, the plans would only involve fewer than half of the land that the ILA markets. About a third of all of the homes build on ILA-tendered land are built on land owned by the JNF. Other land is marketed for sale in projects for private homes on individual plots of land, while still others are assets of the Development Authority, and it is not yet clear how they would be categorized. Yet no agency other than the ILA is required to tender land in the Mehir Lemishtaken framework.

Furthermore, none of the other agencies has experience in selling land, so it will require major organizational changes and put the success of the plan into question.

Ohad Danus, the chairman of the Real Estate Appraisers Association in Israel, says the decision to market government land exclusively through the Mehir Lemishtaken framework marks a continuation of the housing policies of the outgoing government, which emphasized the Target Pricing program in land tenders.

“Mehir Lemishtaken is a good program, which in the past suffered from two main problems. It created housing earmarked for particular population groups, and it did in on a small scale,” Danus says. “Clearly, when the government wants to affect the prices in the market as a whole, it has to carry out this kind of marketing effort on a large scale and hope that new residential construction units influence the price on the second-hand housing market.”

Danus added that implementing the plan would require a large measure of determination and a willingness to devote major government budgets to the matter. “The government will have to think about additional sources of revenue and maybe even raise taxes, but Kahlon has committed not to raise taxes,” Danus warns.

Reacting to proposals that would limit the further purchase of new homes for investment purposes, Danus warns that this could create a vacuum in the rental housing market and push up rental rates. “Kahlon needs to think about how, in addition to supplanting the investors, he can manage to create a mass of rental housing.”

For his part, Nissim Bublil, president of the Association of Contractors and Builders in Israel, cautioned that Kahlon should delve into the subject before making decisions that will have a major impact on the lives of Israelis, and should also enlist the involvement of local government with respect to urban renewal in particular and residential construction in general. He also noted that a shortage of foreign construction workers is slowing construction at many building sites.

Here are some of the highlights of Kahlon’s plan:

1. Managing government land.

The major provision in this section in changing how the public bidding process would work, so that all the public tenders for land go through Mehir Lemishtaken and 80% of home purchasers are first-time buyers. There would also be strict limitations on the resale of these homes, with a total ban for the first five years and an improvement tax imposed during the following five. The land involved would also be distributed to a large number of entities, including local governments.

2. Policy on privately held land.

This is a relatively short section containing two main goals: curbing demand by investors and speculators for land, and providing incentives to private landowners who are holding onto land to encourage them to build on it. The plan calls for discounts and tax exemptions to those who turn over apartments to new owners within five years of the enactment of the applicable legislation.

3. More public housing.

As part of the effort to increase public housing, the plan provides that the management and marketing of the assets of the Development Authority, which oversees the administration of abandoned Palestinian land – constituting about 10% of all land in the country – will be transferred from the ILA to Amidar, the government housing company. The plan also provides that the state’s share in other public housing corporations will be transferred to Amidar, which will be entitled to purchase 5% of all new construction through the Mehir Lemishtaken program.

The plan entrusts a tremendous amount to Amidar, even though the agency has had difficulty up to now in carrying out its basic functions. It should be added, however, that the Housing and Construction Ministry and the Government Companies Authority have made major changes over the past year at Amidar, including the appointment of senior officials from the private sector. Still, the proposed drastic expansion of the agency’s responsibilities has raised eyebrows in the real-estate industry and among government officials.

4. More rental housing.

This is one of the shorter and less explicit sections. It calls for “the construction of thousands of rental housing units during the period of the plan along with a change in the approach to running the government Dira Lehaskir [rental housing] company.”

5. Lowering barrier to urban renewal.

As part of the effort to eliminate the complications and friction involved in negotiations between residents and contractors at urban renewal projects, the coalition agreement provides that legislation will be passed that would authorize a uniform formula around the country for compensation of those who are forced to leave their homes due to urban renewal plans.

6. Reducing costs.

This section deals with a number of steps designed to reduce construction costs themselves. They include enabling Israeli firms to contract with foreign companies to do construction work. These foreign firms would also be allowed to import their own labor forces. For his part, Danus of the appraisers’ association said it would be preferable simply to allow the foreign workers in without necessarily involving overseas contracting firms. The shortage in Israel, he says, is of laborers. “There are enough companies.”