Home Prices in Israel Expected to Rise, After Sharp Decline in Starts, Sales

Zero-VAT law is deterring buyers and builders, threatening later surge in prices.

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New homes under construction in Herzliya.
New homes under construction in Herzliya.Credit: Ofer Vaknin

The government and home buyers got another dose of bad news on the housing market on Sunday, with separate reporting showing that new construction had dropped sharply in the quarter and home sales continued to drop.

Both trends are likely to bring another round of sharp rises in home prices, as the supply of new homes coming onto the market contracts and the pent-up demand for housing eventually explodes, increasing demand.

Home sales reached 8,100 units in June, a small 7% rise from very low figures for May and a 20% drop from June 2013, the Finance Ministry said in its monthly report on the state of the economy.

It said that first-time buyers, popularly designated as young couples, stepped up purchases 4% in June from May but bought 38% fewer homes than in June a year ago. Since April, home purchases have dropped by more than 40%.

Young couples have deferred buying a home in anticipation that Finance Minster Yair Lapid’s plan to eliminate the 18% value-added tax for many buyers of new homes priced at under 1.6 million shekels ($450,000) will go into effect soon.

The so-called zero-VAT plan is aimed at reining in soaring housing prices, but the legislation, which Lapid first unveiled in March, has stalled in the Knesset as it comes under sharp attack from lawmakers and economists, who say it will only spur demand.

The delay in instituting the zero-VAT plan also apparently deterred property investors from buying houses because young couples make up a major part of the rental market. The proportion of investors in total home purchases in June fell to 22.5% from 25% at the beginning of the year, according to the Finance Ministry.

“If the decline in home purchases by investors continues, together with declining purchases by young couples, this will create upward pressure on rental prices,” the treasury said in the reporting, the first time it acknowledges the potential impact of recent housing trends on renters.

Meanwhile , the Central Bureau of Statistics reported that housing starts plunged 20% in the second quarter from the first to just 9.300 units, making it one of the lowest three-month totals in years and bringing new construction down to 2009 levels.

Starts were down in the first half of the year by 11% from the same time in 2013, it said.

The CBS said the number of new-home sales dropped to about 22,000 units in the first half of the year, the lowest since the 2011 social-justice protests also caused the housing market to briefly freeze up.

The number of unsold homes held by contractors rose to more than 27,000 units at the end of the second quarter, the highest in 14 years, the CBS said. Part of the decline can be attributed to the record level of home sales last year, when the number reached about 114,000, but economists and property developers have ascribed most of the decline to zero-VAT, which is causing developers to wait and see how the law will affect the market.

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