The economic futility of the plan Finance Minister Yair Lapid submitted to the ministerial committee on housing prices appears to exceed even the flaws of discrimination embedded in it.
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Finance Minister Yair Lapid announced his plan, which hinges on exempting first-time home buyers from VAT on apartments priced up to 1.6 million shekels (about $461,000), contrary to the opinions of his ministry’s senior officials, the head of the national economic council, professor Eugene Kendall and Bank of Israel Governor Karnit Flug. The VAT rate is currently 18 percent.
Young married couples with at least one child would be eligible for the tax break, provided at least one partner has completed military service and one partner is working.
The discrimination inherent in the proposal against Arabs, ultra-Orthodox people, couples without children and others raises questions as to its constitutionality. Less than a day after the plan’s release, the attorney general said he would not be able to defend it in the High Court of Justice. But even if the plan is given a legal stamp of approval, its economic effectiveness is dubious. New apartment purchases (VAT is not imposed on second-hand apartments) account for only about 8 percent of transactions in the housing market, so it is not clear how much impact the plan will have.
The fear is that if the plan does have impact, it will jack up prices rather than lead to their reduction. During the 2011 social justice protests, when the public was waiting for the government to propose solutions to reduce housing costs, the real estate market froze and the number of transactions declined sharply. The demand that accumulated during this time erupted less than a year later, causing a spike in real estate prices, which have soared in the past five years by up to 70 percent. A similar scenario could take place now.
As long as the government’s steps are focused solely on demand and not on supply, no real solution to the cost-of-housing problem is possible. Until the Israel Lands Authority starts doubling and tripling the amount of land marketed annually, the numerous trial balloons floated by the treasury and the Bank of Israel are pretty much meaningless.
It is universally acknowledged that a product’s price is determined by supply and demand. It is regrettable that Lapid, who lacks economic education and administrative experience, does not heed his advisors, who have the required education and experience in this field. Instead, he disparages them.
The plan and the way it was announced even led to the resignation of the Finance Ministry’s director of economics and state revenues, Michael Sarel. If Lapid’s plan, which is predicted to cost the state 2 billion shekels a year, indeed fails, the public will understand two things, which many already know. The first is that policymakers are unable or unwilling to launch a plan to increase the supply of apartments. The second is that elected officials are making promises they cannot keep.