Israel's Treasury: Want to Spur Housing Construction? Tax Idle Land

State's short of land suitable for development in the center, but there's plenty sitting around while the owners wait for even better prices.

A new idea at the Finance Ministry to lower housing costs in Israel is to reinstate property tax on land approved for development, which however sits there undeveloped.

The idea is that if they have to pay tax on the land, landowners – which are often construction companies sitting on inventory - would actually start building. That in turn would increase the supply of housing, which should lower prices for homebuyers.

Many landowners sit tight on undeveloped land, holding out for home prices to rise further.

Behind the notion is severe depletion of state land available for development in central Israel. The Israel Land Authority knows it won't be able to sell much land for housing in the prime areas of the center this year. Meanwhile, home prices soared 4.5% in the second half of 2012 and building starts have been on the decline.

The hope is that imposing property tax on laggard landowners will bring succor by spurring them to increase the supply of housing, rather than the state.

The government also seems to have exhausted its ability to boost the housing supply in the short-term by shortening planning and approval processes.

The increase in housing prices during the last year originated from different causes than the increase in previous years.

In the past the constraint on the housing market was the ILA being sluggish about selling land, and the glacial processes at the local planning and building committees. Then from 2009 and 2011 the ILA ramped up land sales by 48%, resulting in a 45% jump in the housing supply from the end of 2009 to the end 2011. Come 2012 the ILA drastically scaled back its sales again, and the housing supply slumped anew.

Now, as the treasury considers its staggering budget deficit and the paucity of options, the idea of taxing landowners, builders, and investors who the state feels are responsible (in part) for the increase in housing prices is making a comeback.

Regarding investors, two weeks ago TheMarker reported the treasury plan to cancel betterment tax exemptions on homes bought for investment purposes.
 

Daniel Bar-On