Israeli Finance Minister: We’ll Solve the Housing Crisis Within Two Years

Apartment prices have soared over the past decade, but Moshe Kahlon tells TheMarker he’s bullish about his plan to tax the owners of multiple homes.

Finance Minister Moshe Kahlon on July 26, 2016.
Olivier Fitoussi

It’s been a year and a half since Moshe Kahlon, the leader of the Kulanu party, became finance minister, and he’s in unfamiliar territory. As communications minister, he was the public’s darling when he drove down prices for cellular telephone packages. But now people are upset about his decision to tax owners of three or more apartments.

Kahlon considers himself a politician working to lower taxes and the cost of living, but he has discovered that to effect change at the Finance Ministry, sometimes you have to use unpopular methods like taxes. The paradox is that his decision to tax the owners of three or more apartments is actually designed to lower housing prices rather than generate tax revenue.

Kahlon’s logic is that if the owners of three apartments have to pay a special tax, they’ll seek to sell one of the properties, boost supply and maybe lower housing prices. Such logic may work in a normal market, but in recent years the Israeli housing market has seen great demand, so the fear is that the new  policy will simply push landlords to pass the tax on to their tenants.

In any case, the more surprising thing is the intensity of the opposition. As expected, the owners of multiple apartments are complaining, but so are many politicians, and even at the Finance Ministry and the Tax Authority some people don’t love the idea, concerned that it will distort the market. In the meantime, owners of apartments as an investment are pressuring Kahlon to halt the plan.

Finance Minister Kahlon, you’ve said a lot of people are sending you angry text messages because of your intention to tax owners of three or more homes. Who’s doing this?

“When I came to the job, we found an emergency situation in housing. Young couples can’t obtain housing and investors are collecting apartments and not letting others have them. That’s unfair competition, because for an investor with a lot of money who wants to buy an apartment, an additional 50,000 or 70,000 shekels ($18,000) for an apartment is really nothing compared to a young couple just starting out in life and trying to save 5,000 shekels.”

And who are these people with a third apartment? People who are self-employed, or who have tenure at work or a high salary?

“These are 50,000 people who don’t need social welfare services and don’t get income assistance, and that’s okay .”

Jerusalem housing construction. A crane towers over a construction site in the capital.
Daniel Bar-On

Are these millionaires or regular folks who’ve saved one shekel at a time and bought apartments?

“I don’t think they’re millionaires, but that’s not important. This tax is aimed at behavior. It’s not designed to collect taxes. We don’t need the money.”

Do you think imposing such a tax will make these people sell apartments?

“In the current period, the Israeli government is really determined to solve the housing crisis through steps that aren’t easy. And I realize that these steps are painful and difficult. But if the government is serious, it needs to do these things. If it’s an emergency situation, you do painful things. Within a year or two, the crisis will be solved. Life will return to normal.”

I haven’t gotten the impression that the cabinet and Knesset are behind you on taxing third apartments. There’s a lot of political opposition, and opposition among apartment owners. Do you think the tax provision will pass?

“Yes, I have no doubt that it will pass.”

If not, would you break up the governing coalition over such a thing?

“I won’t break up the coalition. You don’t have to break up the coalition over such a thing. The tax will pass because it's right and just.”

Reining in the banks

But maybe the housing market is more complicated than the cellular market, where it was easier to pressure the three major companies at the time.

“I think no market is the same as another, and every market is similar to the others. In the cellular market, there were power groups, so they said it was hopeless.”

But in the cellular market there were three companies that were stung by increased competition and 8 million people who benefited. When you act in the housing market, hundreds of thousands of Israelis can be hurt or benefit.

“Let’s start with the fact that most people don’t want prices to go down. People are asking me to lower housing prices, but not on their own apartment. I’m trying to find a formula under which the price of everyone’s apartment in a building goes down, but not their own [smiles] .... I know one thing, that from the moment our programs begin to work, there will be an impact on prices. I don’t want to make declarations.”

You don’t have a target of lowering housing prices by 10% or 15%?

“I have as a target that housing prices return to a normal situation.”

What’s a normal situation?

“A normal situation means a reasonable number of monthly salaries [to pay off a mortgage], as in most countries around the world.”

Let’s talk about senior executives’ salaries. Why are you imposing limits only on the financial sector and not on all publicly traded companies?

“The issue is simple. I saw that the Andorn Committee had finished its work, doing excellent work, making recommendations for the financial sector and using convincing reasoning. It would have been possible to stop everything and do a reexamination, but I had this ready and think it’s excellent; there’s no reason at the moment to elaborate.”

It won’t suck good people out of the financial sector?

“It won’t suck good people out, and even if it does, that’s okay. Everyone wants to do everything and ultimately they do nothing. I decided on housing. I’m doing it. I decided to separate the credit card companies from the banks, and we’re doing it .... Can I tell you that everything is perfect? No. We’re human beings. We do things, and those who do things also make mistakes.”

Letting Lieberman be

Many people see you as the most reasonable person in the cabinet. You’re the one who said that this government needed to be hospitalized, and people expect you to guard the judicial system and the public broadcasting corporation. People thought maybe you should have blocked Avigdor Lieberman’s appointment as defense minister. They don’t know you’re his friend, so they’re disappointed in you. Are you aware of this?

“I understand the expectations, but protecting the Supreme Court is in our coalition agreement, as is the court’s makeup. I’m telling you that if I hadn’t been there, all of these laws would have been different. Undemocratic laws too. Regarding Avigdor Lieberman, I don’t personally rule out anyone. People have to be checked out and sized up.”

Does he look like an appropriate defense minister to you?

“If he’s there, he’s certainly appropriate.”

Is he better than his predecessor Moshe Ya’alon?

“I can’t grade them for you.”

Avi Gabbay, a member of your party, quit the government in protest at Ya’alon’s dismissal and the appointment of Lieberman. Do you share his view?

“If I shared his view, I would have resigned with him.”

But you understand his anger over the dismissal of a defense minister with a very impressive record compared to a minister who was an army quartermaster and who has a habit of being harshly critical. He’s someone who once promised he’d take out Hamas leader Ismail Haniyeh within 48 hours.

“We live within a political system. Everyone has a constituency that voted for them, and there’s a prime minister who builds a coalition. On the day I decide that I can’t be in the coalition, I won’t be. Avi decided that he couldn’t be, and he got up and left, and that’s okay.”

Isn’t Avi Gabbay the type of person you’d want to have in politics; someone who’d change things a little so you don’t wind up knee-deep in the stench?

“If you tell me you’re a man of principle and don’t compromise six times a day, I won’t believe you.”

The question is what you’re compromising over. We’re talking here about the defense of the country, major things.

“I’m not going to get into the details right now, but no one gets everything they want. We have 10 [Knesset] seats; 7.5% of the vote.”

But a situation has been created where, with your 10 seats, you can decide if the government will survive. You can use this power to set red lines.

“True. We haven’t yet reached those red lines.”

You haven’t reached the red lines?

“We’re far from the red lines.”

What are your red lines in this government?

“I don’t set red lines, but I'm telling you we’re not there. I think this government is functioning, working. This government has crises like any government. There are coalitions, there’s a country with huge numbers of fissures, with a huge number of communities, and each one is pulling in its own direction.

“Who better than I as finance minister knows and sees it? So you have to understand that we have to compromise, but there are also overriding goals. I’ve set goals and we’ll accomplish them.”

At TheMarker, we want public transportation to be a very high priority, but it looks like the treasury, which you control, has become addicted to revenue from cars, and much of the investment in infrastructure is actually for cars. Are you taking part in discussions on whether the money will go to public or private transportation?

“I think the figures you’ve provided aren’t right. We’re investing a huge amount in public transportation. There are pilot programs and there’s investment in infrastructure; in the Arab community, for example. I tell the high-tech people I meet with that at the moment there’s a housing crisis ”

There’s a link, by the way, between the housing crisis and public transportation.

“But the next crisis in Israel is public transportation. Any startup developer who wants to find mass transportation solutions – now’s the time.”

But the solutions are known. Fast light rail, subways and buses.

“No one can say we’re not investing in trains here.”

It’s still not reasonable, and you’re still making me use my car – and not get on a train and get to work in 15 minutes like in most major cities around the world.

“We’re investing billions in trains, in infrastructure, and as finance minister, I say that this is the next crisis that we see. And we’re addressing it with all our might.”