Everything You Need to Know About Lapid's Zero VAT Plan for New Home Buyers

A primer on Yair Lapid’s proposals to help first-time home buyers, which just took their first steps toward legislation.

Ofer Vaknin

Although many of the details have yet to be worked out, one program backed this week by the ministerial housing committee would give certain first-time home buyers an exemption for the 18% value-added tax on new residential construction.

Based on the proposal by Finance Minister Yair Lapid, the incentive would be limited to homes costing up to 1.6 million shekels ($458,500). Another program would establish a so-called target-price plan through which developers would bid for the purchase of government-owned land, on condition that they build housing on it at below market prices.

Your questions answered below...

How is the target-price bidding supposed to provide apartments at 20% below the market rate?

In connection with the public tenders that the Israel Lands Administration will issue for the sale of land to developers, the final price paid by the consumer on 80% of the apartments will be set at 20% below market rates. Furthermore, no minimum price will be set on the land sold to the developers. Advocates of the plan hope that, in this way, the sale of large amounts of land for construction in the heart of high-demand areas will also bring down the price of secondhand homes, in addition to homes in outlying areas of the country.

If I buy an apartment built through the target-price program, am I also entitled to a VAT exemption?

Probably not. The draft decision providing VAT exemptions to first-time home buyers bars providing the benefit to those who purchase homes through the existing reduced-cost housing program known by its Hebrew name, “Mehir lemishtaken.” Although the decision doesn’t explicitly bar an exemption on VAT for those buying through the proposed target-price program, it is assumed that such double-dipping will also be barred once the two programs are in place.

Is the target-price program likely to increase the supply of homes that meet Finance Minister Lapid’s criterion that qualifying homes not sell for more than 1.6 million shekels?

Even if the target-price program increases the supply of housing in the price range, buyers of homes through the program won’t also be entitled to a VAT exemption.

Do the two programs – the VAT exemption and the target-price plan – apply all over the country?

By limiting the VAT exemption to apartments priced at no more than 1.6 million shekels, the program becomes less relevant in high-demand areas such as the Tel Aviv and Jerusalem areas. On the other hand, when it comes to the target-price program, that plan is less applicable to outlying areas of Israel, where land prices are already less expensive.

Will the proposed plans increase the supply of housing?

Two ministerial committee decisions this week that actually got relatively little media attention will help rapidly boost housing stocks. One authorizes the state to enter into blanket agreements with local authorities to build thousands of housing units in a short period of time. The second provides monetary rewards to local authorities that issue a large number of residential construction permits over the next several years. The VAT exemption and the target price program don’t deal with the supply side of the equation, and many people think they will actually increase demand pressures.

If demand increases, what will its effect be?

If the two high-profile programs do boost demand but are not coupled with a substantial increase in supply, the implications could be disastrous for home buyers. Instead of lowering prices, new homes qualifying under the programs will become a scarce commodity that will be snapped up by buyers. In addition to resulting in a situation in which most members of the public still face high housing prices, this could also encourage a black market and under-the-table payments, something Bank of Israel Governor Karnit Flug warned about.

Is the 1.6 million shekel maximum home price connected to the VAT exemption final or subject to possible changes?

That’s the ceiling appearing in the ministerial committee’s decision, but it could be subject to change. In general, decisions such as these provide the basis for more detailed legislation to be presented to the Knesset. Until it is passed, probably around August, a lot could happen.

What about Lapid’s initial suggestion that the program only apply to buyers who have done either military or national civilian service, which effectively excludes most ultra-Orthodox and Arab first-time home buyers?

Attorney General Yehuda Weinstein has stated that such provisions would not be legal. Due to his objections, the proposal approved by the committee simply states that entitlement for receiving benefits would be set considering factors including army service, family status, age and disability.

What about the eligibility criteria for the target-price program?

Things are simpler here. Other than those buying homes for investment purposes, the plan is expected to be open to the entire public – couples, singles, those with children and without, those trading up to better homes, and those buying a home for the first time.

Where will the funding for the plan come from?

Karnit Flug also asked that this week, even demanding that the Knesset vote on the issue. However, the finance minister has said the question will be dealt with in the context of deliberations on the 2015 state budget.