Israelis have been crying out for cheaper housing. Middle class people can't afford to buy a home for themselves, let alone the kids. But how to achieve that aim?
Attacking the problem of housing prices by taxing investors - people who buy a home not to live in, but to rent out - sounds socially correct. It falls in line with the “new politics.”
The problem is that it won't work. Investors aren’t to blame for the latest round of price escalation.
“Until 2007 there was a large supply of housing and prices declined even though the rate of construction was low,” Bank of Israel Governor Stanley Fischer stated at a press conference last week. “As the inventory dwindled and the number of home buyers increased, supply couldn’t keep pace and prices began rising. Another factor pushing up housing prices was declining returns on alternative assets in the financial markets, including stocks and long-term bonds, driving investors to buy homes.”
Fischer took issue with critics who claimed it was falling interest rates that drove prices up, explaining that interest rate policy has implications beyond the field of real estate and that the effect of high interest rates given the current situation would be harsh on other sectors of the economy.
“The changes in interest rates affect housing demand and, in the absence of growing supply, lead to escalating prices,” he explained. “But bringing about a simultaneous increase in housing inventory and drop in prices requires boosting supply, increasing the supply of land available for building − Which actually dropped in mid-2012, and shortening the time needed for planning procedures.
National housing committees
“The government has already taken certain steps: It set up the national housing committees (to cut through red tape) and instituted changes in the Israel Lands Administration,” continued Fischer. “But these moves apparently weren’t successful and need to be rethought. Changes in taxation are also called for to weaken the effect of investors.”
The first change in taxation, on which the governor spoke openly, was to extend the period of time investors would need to hold on to a property in order to qualify for exemption on improvement taxes from four years to seven years. This was tried by the previous government but was never, in fact, implemented.
The Finance Ministry wanted to be more drastic and completely abolish the exemption for investors. But the measure was softened at the behest of the chairman of the Knesset’s Finance Committee at the time, Moshe Gafni, and then abandoned altogether. The mood in the treasury now is to try renewing efforts towards totally eliminating the exemption, but Fischer’s stance is actually closer to Gafni’s on this issue.
Another move apparently supported by the central bank is putting taxes on real estate on an equal footing with those on other assets, which likely means taxing rental income. There are currently a number of rules governing taxation in this area, but basically a landlord receiving up to NIS 4.980 a month pays nothing. The idea of putting property holdings on a par with other investments leads to the conclusion that rental income would be taxed at 20% to 25%.
This could represent a form of social justice: Until now property investors benefited from generous tax exemptions as opposed to other investors, without any justification. The exemptions may have been justified 20 years ago by the urgent need to find housing solutions for the flood of new immigrants, but not anymore.
Opponents of rent tax have argued in recent years that investors supplied an answer for growing demand for rental units by buying up tens of thousands of homes a year. They claim this has kept rental prices from keeping pace with purchase prices. They also warn that if such a tax is imposed, landlords will pass the cost directly onto their tenants by raising their rent.
In principle these are two contradictory statements because as soon as the supply of rental apartments goes up, the power of investors to raise prices as they wish is curtailed. But the real test would only occur when tax is imposed: Only then will it be seen whether rents in Israel have increased due to the tax and by how much.
This is just one of the tough problems concerning rental housing. Except for a quarterly survey by the Central Bureau of Statistics, there isn’t much real information on what’s happening in this market: The vast amount of numbers and prices being bandied about are nothing but speculation. Straightening out the market and making it much more transparent than it is today is vital for everyone connected with it: investors, tenants and the state.
What can be established is the degree of truth in the hypothesis voiced by Fischer that investors are responsible for prices rising in recent years and therefore imposing taxes on them will dampen the escalation. Data from the State Revenue Administration concerning 2007 to 2012, the period referred to by Fischer in his speech, reveal that what he said was correct − for 2009 and 2010.
From the beginning of 2009 to the end of 2010, homes bought as investments rose on average by a nominal 63% in price compared with a 43% increase for homes bought by non-investors. Since the beginning of 2011, however, prices of non-investors’ homes increased by a nominal 2% on average while those bought by investors dropped by a nominal 4%. Low returns can be assumed to be one of the reasons behind the fall in prices.
Fischer also mentioned investors’ attraction to the housing market but here too the data shows this was only true until two years ago. From the beginning of 2007 until the end of 2010 investors accounted for at 28% of home purchases, at times even reaching over 30%. In 2009 and 2010 there were places like Be’er Sheva and Haifa where more than one third of home purchases were made by investors.
But this situation is also long behind us. In the past two years the rate of investor participation in the housing market plunged by about one-fourth to around 23% in recent quarters, retreating to about the same level as in the recession years of 2002 and 2003.
So from the standpoint of social justice and tax revenues perhaps increasing the tax burden on investors is justified. But anyone mentioning taxation as a means of curtailing the escalation of prices is talking about a battle that should have been fought three years ago.