Sorry, Kahlon - That's No Way to Reduce Housing Prices in Israel

Finance Minister Moshe Kahlon has taken the most wrongheaded step possible, and no one will tell him the truth.

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Moshe Kahlon at Tel Aviv University, September 18, 2014.Credit: Ofer Vaknin
Nehemia Shtrasler

It’s so disappointing, and so sad. After all the announcements, plans and promises, Moshe Kahlon has taken the most banal and wrongheaded step possible, raising taxes.

That was his first decision as finance minister, to raise the purchase tax on homes. It passed the cabinet easily this week. Kahlon’s second mistake is his support for rent control. Let’s hope Justice Minister Ayelet Shaked can shoot that one down.

The problem is there’s no one in the Knesset to stand up and say the emperor is naked. No one to represent the overburdened taxpayer. The cabinet ministers and Knesset members believe their main job is to transfer funds from the public to the treasury, even though the public is smarter about spending than they are.

Amazingly, even the Finance Ministry’s budgets division supports raising the purchase tax, saying it will make homes more affordable for young couples. The truth is that the officials want to add 600 million shekels ($156 million) to state coffers, even though their real job is to increase efficiency and reduce spending.

They say that raising the purchase tax will reduce by 10 percent the demand for rental apartments. How did they get to this? Can they really estimate the flexibility of demand so precisely?

Pay attention to the numbers. An apartment that costs, say, 2.5 million shekels will now cost 2.55 million, 50,000 shekels more. What a huge difference! Investors will flee, for zero-yield bonds. Smart move.

I asked several builders what happened after the tax hike was announced. They said people bought apartments over the telephone, sight unseen and without bargaining, and the builders took advantage of the situation to raise their prices! The economists in the budget division can learn about the giant leap in home loans in May and June from the mortgage banks.

In other words, one thing is certain: The treasury and Kahlon have done enormous harm to first-time home buyers. They caused a decrease in the supply of new apartments and an increase in their price. They didn’t even realize that talking about a future tax is like talking about an impending currency devaluation. It seems the desire for publicity beats logic and responsibility.

Kahlon and the bureaucrats also have another problem. The rental market is sophisticated and remarkably efficient. That pains them. They are unwilling to admit that for decades the state failed to build rental housing. It was the private investors who took action, buying an additional apartment as a nest egg, renting it out for relatively low returns and in the process providing rented housing for hundreds of thousands of Israelis (28 percent of all households).

And now, instead of being applauded they are being slapped with more taxes, more laws and more restrictions.

It’s also clear that when there is excess demand and rigid short-term supply, landlords will pass most of the tax increase onto their tenants. In other words, Kahlon and the budget department are hurting the most vulnerable population, people who do not have enough capital for a down payment on an apartment and must as a result live in rental housing. And Kahlon calls himself “pro-social welfare.”

The rest of Kahlon’s housing plans are also quite disappointing. The mehir lemishtaken plan, which offers apartments at reduced prices to certain first-time home buyers, is terrible and highly bureaucratic and it will only increase demand and raise prices for the majority of home buyers, who are ineligible. The construction workers that Israel plans to bring from China will reduce the wages and social benefits of Israeli workers and even lead to layoffs. Kahlon’s ludicrous handling of the Israel Lands Authority will achieve the exact opposite of increasing the supply of land. And all this is merely a partial list.

And what about credibility, which is so vital to the finance minister’s position? Kahlon raised the purchase tax despite having promised, over and over, that he wouldn’t raise taxes. So how are we supposed to believe him the next time around?

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