Bank of Israel Governor: House Tax Will Lower Home Prices but Raise Rents

Karnit Flug sees economic growth gathering pace after brief slowdown, gives lukewarm backing to finance minister's plan to tax owners of multiple homes.

Bank of Israel Governor Karnit Flug.
Emil Salman

Bank of Israel Governor Karnit Flug said Monday that economic growth has been looking up in the last several weeks after a brief slowdown and gave lukewarm backing to Finance Minister Moshe Kahlon’s plan to tax owners of multiple homes.

In her quarterly press conference, Flug said the controversial tax would cause home prices to fall but would probably lead to an increase in rents. In any event, she said there were signs the overheated housing market was cooling down even without the tax.

“The proposed tax can be expected to contribute to a certain decline in home prices, especially for those buying their first homes. We still can’t estimate the extent of the decline,” Flug said.

As to its effect on rents, she said: “We’re seeing here a trade-off. The government has chosen where to flex its muscles. It’s obvious that the significance of a tax like this is that it will act to bring down housing prices, even if it comes as the cost of higher rents.”

Kahlon’s plan call for taxing people who own three or more homes in a bid to deter investment in residential real estate investment. But critics have said the cost of the tax could end up being passed on to renters.

Flug spoke as the central bank announced it was keeping its base lending rate at 0.1% for the 19th straight month even as it raised its growth forecast for the economy. Bank of Israel economists said gross domestic product would probably grow 2.8% this year, up from a previous estimate of 2.4%, and that growth would accelerate in 2017 to 3.1% from a previous 2.9%.

Israel’s economy expanded by an annualized 4% in the second quarter of 2016, revised up from a preliminary 3.7%. Growth was led by consumer spending but exports rebounded after recent weakness.

“After relatively slow growth in the first quarter, which we believed were the result of one-time factors, in the last several weeks data have accumulated pointing to a recovery of growth, helped by expansionary monetary policy,” Flug said. “For the first time in a long time we also saw nice growth in exports after an extended freeze.”

Flug said that while soaring housing prices continued to preoccupy the public’s attention, recent figures have shown “encouraging signs.” The second quarter saw growth in building starts while mortgage rates have been rising. The Central Bureau of Statistics said prices had slowed to a 6% annual pace in June-July from 7% in May-June.