The Bank of Israel is targeting real estate investors as a way of cooling the housing market and is looking to the Ministry of Finance as a partner in the plan. At yesterday's press conference after the interest rate announcement, Bank of Israel Governor Prof. Amir Yaron floated the idea of raising purchase tax on apartments for investment, two weeks after prohibiting banks from granting mortgages taken on an existing home to be used to buy another home.
These measures seek to reverse two decisions taken by the previous government and which have fueled real estate market rises. The first was former Minister of Finance Israel Katz's decision to cut purchase tax from 8% to 5% in July 2020 and the second was to increase the restrictions on the higher risk, low rate prime interest that could be taken on mortgages. This was a boost for mortgage takers with the Bank of Israel saying again yesterday that interest rates would remain low for a protracted period.
The Bank of Israel now seems startled by the growing demand for mortgages with more than NIS 10 billion taken in mortgages on June, while housing prices continue to rise. This situation contradicts the Bank of Israel's desire to cool the housing market.
It is hard to see a situation in which the government will hike purchase tax on apartments for investors so soon after it was cut. Nor is the Bank of Israel likely to restore restrictions on prime flexible interest rates. It is more feasible to cancel the income tax exemption on renting out a home for less than NIS 5,100 per month. Cancelling the exemption would represent a kind of tax on buying homes for investment. In any event, Yaron's comments yesterday put the ball in the Ministry of Finance's court because he himself has no tools for cooling off the housing market. This is not included in the bank's aims and does not even effect inflation because housing prices are not part of the Consumer price Index (CPI).
A further blow to the implementation of Amir's proposal is that new Minister of Finance reiterated only yesterday at a conference in Eilat that he is "not touching anything" until after the state budget is passed.
It is easy to understand Liberman's reasoning. Introducing a higher purchase tax for investors buying homes or cancelling the exemption on renting out a home is liable to arouse antagonism and put a spoke in the wheels of attempts to pass the budget. But what is not done now will be even tougher to do later. So home prices can continue to rise while ideas to cool down the housing market will have to wait until after the budget.
Published by Globes, Israel business news - en.globes.co.il - on July 6, 2021
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