After two years of talk and little walk, primarily aimed at changing the market psychology, this time, despite all the natural skepticism about the Israeli government, it looks like the real deal.
Contractors, young couples, farmers, and mayors are outside the equation this time. Minister of Finance Yuval Steinitz and Minister of Housing and Construction Ariel Atias, backed by Prime Minister Benjamin Netanyahu, directed their joint measure solely at investors, the most dominant factor that has ignited the overheated housing market in the past two years. They accounted for 31% of apartments bought in 2009 and 25% of apartments bought in recent months.
Raising the purchase tax on apartment purchases by new investors, especially since the tax hike is for two years, will necessarily lower demand for residential real estate as an investment instrument. The tax hike may not affect investors who love apartments as investment in the same way that they abhor for stocks or bonds (and there are many such people), but it will undoubtedly affect thousands of other people who want, albeit belatedly, to jump on the onrushing train, offering them a product whose price only goes up, and for which financing is especially cheap. (The Central Bureau of Statistics last week reported that home prices rose over the previous 22 consecutive months).
Do not denigrate the so-called "negligible" NIS 15,000 increase in taxes on the first NIS 1 million in sale price and NIS 25,000 increase in taxes on the second million shekel. According to the Ministry of Finance, the median income of investors in apartments was less than NIS 11,000 a month in January-September 2010.
Such investors are in hock when then arrive at the bank. They also see that the interest rate is rising, even if it is still low by historic standards, apartment prices are beginning to stagnate and even fall, according to the Ministry of Finance, and the Bank of Israel is imposing new capital restrictions on mortgage loans. In addition, gross rental yields are barely 3-4%, and maintenance and other expenses further reduce the net yield.
The conclusion is clear: the train that offered homebuyers a profit on the differential between the purchase price of an apartment and the sale price, has reached its last stop, at least for a while.
Many investors and owners of second and third apartments (even if they are only on paper) will now try to get off the train, before it begins to make the trip back. These tens of thousands of investors who own additional apartments and who have now concluded that prices have peaked - because of the rate of housing starts, the increase in marketing, measures by Governor of the Bank of Israel Prof. Stanley Fischer, slogans by Netanyahu, and whatnot - but did not do anything, in order to avoid giving the state 20% of the profit between the purchase and sale price - a tax that has been cancelled for two years - will now sell.
In addition, many landowners will see offers for combination deals from developers and contractors (offering some apartments in a project instead of cash, which reduces the contractor's expenses and risk). These landowners will be able to put the two of these apartments that are exempt from the betterment tax up for sale immediately. This will increase the number of combination deals, boosting the supply of new apartments.
Not everything is perfect. To borrow an analog from the great Carmel fire, after all the fire trucks and light firefighting planes failed to put out the flames, Atias and Steinitz have brought in a supertanker to dump water precisely where it is needed. But this does not solve the core problem.
Transferring apartments from investors (leasers) to first-time homebuyers (tenants) will apparently put out the flames that accompanied the rise in home prices over the past two years, but it will not build new homes.
New homes has been at the heart of Israel's residential real estate problem for the past decade. According to the Israel Tax Authority and the Bank of Israel, a net new 302,000 homes were built in 2000-09, and 385,000 new households were established for the same period. The surplus of 44,000 new homes over new households in 2000 turned into a shortfall of 39,000 homes in 2010.
If this trend continues, without anyone making long-term plans to meet the land and housing needs of Israeli citizens as well as those Jews who want to own a home here, within a few years, not even Tax Authority director general Yehuda Nasradishi will be able to help solve the real estate shortage.
Published by Globes [online], Israel business news - www.globes-online.com - on December 19, 2010
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