Property-tax Hikes Taking Toll on Luxury Real Estate in Israel

Number of transactions has dropped sharply since purchase tax was boosted.

The market for luxury homes in Israel traditionally stands apart from the rest of residential real estate, but a survey by TheMarker shows that Finance Minister Moshe Kahlon’s efforts to crack down on property investing is having a chilling effect on pricier homes.

In the market for the most expensive homes in Israel, those changing hands at 5 million shekels ($1.33 million) or more, the number of home sales plunged in the first half of the year, the latest for which figures are available.

In the first six months of 2016, 309 sales were completed, according to Finance Ministry data. The annualized rate of 618 sales marks a sharp downturn from the approximately 1,000 transactions for all of 2015, and a reversal after three years of increases.

The annual data are somewhat misleading. Drilling down, figures show the downturn actually began in the middle of last year. In the first five months of 2015, the average number of 5 million-shekel-plus home sales was 90 per month, jumping to 175 in June. In the second half of the year, the average dropped to 65 a month.

July 2015 was the decisive month. Kahlon put into effect the first of his measures to deter people from investing in residential property by hiking the property-purchase tax for investors to 8% from 5%. In June investors piled into the market before the tax went into effect and has since pulled back.

Kahlon's key plank

Kahlon has made deterring property investors a key plank of his strategy for reining in Israel’s soaring home prices. He has also worked to increase supply, but Kahlon is especially interested in helping first-time home buyers, known as “young couples” in real estate parlance, who he says are being crowded out of the market by investors with deeper pockets.

The luxury market is small, making up 1% of all transactions, but investors play a big part in it, and with the big price tags that homes in the segment carry, tax increases add significantly to their costs. Someone buying a 5 million-shekel home with the higher purchase tax faces a 402,000-shekel assessment; for an 8 million-shekel property the bill is now 702,000.

Currently Kahlon is trying to steer through the Knesset another tax, which would subject owners of three or more residential properties to a special tax, starting in January 2017. The threatened tax has acted to deter investors even more.

Foreigners are being especially hard hit. Two years ago they were classified as investors when they buy homes in Israel, subjecting them to the new taxes. Meanwhile, Jerusalem and other municipalities are imposing double-rates of arnona (municipal tax) on properties that aren’t occupied most of the year, typically luxury homes that foreigners use when they visit a few weeks a year.

Most of the Israeli luxury market is in Tel Aviv, which accounted for 54% of the total in 2015. Jerusalem made up 12%, Herzliya 9%, Netanya 6%, Ramat Hasharon 4% and Ra’anana 3%.