While rents are making tenants cry out to high heaven, we do also need to look at the other side of the coin, at what is happening to landlords with homes for rent. It’s hard to believe that, just 20 years ago, in 2003, fewer than 60,000 Israelis, 3.2% of Israeli households, owned two or more homes, and even they generally came by the additional homes through inheritance. Today, the number of people who own at least two homes is almost six times as high, accounting for 13% of Israeli households, or 348,717 people, according to figures supplied to "Globes" by the Israel Tax Authority.
How significant are these figures? Every time that someone at the Ministry of Finance, for example, tries to do something about landlords - a proposal to tax those with three homes or more, a proposal to abolish the income tax exemption on rents below NIS 5,196 monthly, proposals to abolish the 10% taxation track for those whose rental income is above the exemption limit, and so forth - he quickly discovers how strong and influential the landlords’ lobby is. It’s not just that they represent 13% of Israeli households, a substantial proportion of the electorate that will not be at all happy of the state puts its hand in their pockets; they represent a much higher proportion of those in the circles of power who are close to the decision makers and influence them, persuading them time after time to leave well alone.
Apartment lotteries turn tenants into landlords
The situation has become even more complicated in the past few years, with many badly off tenants, begging that their rents should not be raised, themselves becoming landlords, and having to raise rents for their tenants, because they are paying more for their own homes, and perhaps more for their mortgages. The Ministry of Finance continues to identify investors only if they own at least two homes, but skyrocketing apartment prices in the past fifteen years and the lottery method for subsidized homes, which meant that people would buy where they could and where they won, and not where they wanted to continue to live, opened up a huge market of investors and landlords operating below the radar. Only recently has even the Ministry of Construction and Housing admitted, on the basis of a survey of 12,689 families who received the key to a subsidized apartment, that 36% of these apartment buyers do not live in the apartments they bought, turning them, in effect, into investors.
Political and regulatory paralysis
When one in eight Israelis has an apartment they rent out, there is clearly a real political problem in making life difficult for landlords, and even in enforcing existing laws. This, incidentally, is a problem unique to Israel. In Germany, for example, which is known for the care it takes of tenants (limiting landlords’ ability to raise rents, for example) almost half the population lives in rented accommodation (in Berlin it’s 85%), which explains why both local and national politicians have to show empathy towards them, while in Israel they are no less careful not to offend landlords or harm them financially.
Thus it was that, last summer, Minister of Justice Gideon Sa’ar and Minister of Construction and Housing Ze’ev Elkin removed from the agenda of the ministerial legislation committee a section of the Economic Arrangements Bill that, for the first time, would have obliged landlords to report their rental income. Apart from the prospect of tens of millions additional annual revenue, the Ministry of Finance had hoped that many Israelis would prefer to avoid entanglement with the Tax Authority and would sell their extra homes, thus injecting supply into the market. No less importantly, the reporting requirement would finally have created an authoritative and reliable database of the rental market. But, as mentioned, Sa’ar decided to withdraw the new section from the Economic Arrangements Bill, on the grounds that the fine for failing to report - NIS 500 - was not proportionate.
In such a situation, when the power and number of owners of two homes or more is worth more than fifteen Knesset seats in an election, it’s no wonder that even the Israel Tax Authority doesn’t really bare its teeth, for fear of the mighty lobby breathing down its neck. The Tax Authority’s supposed attempts to hunt down apartment owners not paying tax as required have been derisory, mainly consisting of sending warning letters to owners of three or more homes. When transgressors are caught here and there, they are generally given pretty ridiculous fines, and few of them end up in court.
Furthermore, the Tax Authority has not even really decided when renting out a home counts as regular income. Only in 2018, after the courts acceded to the Tax Authority’s request and ruled that renting out more than 20 homes should be taxed like any business, did the Tax Authority publish a "Draft Circular Clarifying the Position" according to which renting out more than ten homes will henceforth be counted a business to be taxed on the basis of regular income tax, while renting out five to ten homes will be examined "each case on its merits" and will not automatically qualify for the low taxation track. Four years after that draft was released, however, no-one at the Tax Authority or in the government has dared to make its provisions mandatory.
Against that background, the Tax Authority’s figures for the end of 2021, cited here for the first time, also show substantial growth in the number of people who own more than one home in Israel - apparently the most popular form of investment in the country. 267,768 people owned two homes at the end of last year, 8% more than a year earlier, and 22% more than at the end of 2017. Another 78,928 people owned three or more homes in Israel, 31% more than at the end of 2017.
Unsurprisingly, it turns out that low interest rates, wariness of investing in the volatile capital market, and the sense that a home was the safest and most worthwhile investment in Israel, continued make the number of people buying additional homes rise year after year.
Even when steps are taken against investors, they restrict new buyers, and not those who already hold more than one home. Thus, in June 2015, in one of his first acts as minister of finance, Moshe Kahlon raised purchase tax for new investment buyers, those who already owned at least one home, from 5% to a starting rate of 8%. In 2017, the "many homes tax" on people owning three homes or more (who, as mentioned, then numbered some 60,000), came into force. The tax amounted to 1% annually on the value of each home. That summer, however, the Supreme Court scratched the law, on the grounds that the legislative process had not been properly followed. Even before Kahlon, in 2012, the Bank of Israel rallied round when it limited the mortgage loan that investment buyers could obtain to a maximum of 50% of the value of the purchased asset.
In 2013, then minister of finance Yuval Steinitz abolished the exemption from capital gains tax - 25% of the difference between the buying and selling price - on the sale of a home that was not a sole home, which was meant to cool the enthusiasm for investing in residential real estate (although the calculation applied only from 2014, again in order to minimize the damage to those who already owned investment homes).
Investors aren’t the problem
The question whether the state should make life harder for investors, or actually make it easier for them, is not, however, a simple one. Investors are basically people who rent out homes, adding supply to the rental market, which should lead to better conditions for tenants. Just last week, Ministry of Finance director general Ram Belinkov said at the annual conference of the Aaron Institute for Economic Policy at Reichman University that "the investors aren’t the problem in the Israeli economy, because they rent out the homes." Setting aside the question of the reliability of the Central Bureau of Statistics’ figures, the fact that it reports a rise of 40% in rents in the past decade, while home prices shot up by over 80%, is attributable to, among other things, the increase in the number of investors, who ultimately operate in a very competitive market, of hundreds of thousands of people with homes for rent.
The generous tax exemption on renting out a home in Israel is a result of a temporary ordinance dating from the 1990s, when the state wanted citizens to buy and rent out as many apartments as possible, because of the demand generated by the large waves of immigration. Is the reality of the rental market in 2022 so very different from that shortage? Add to that the fact that a quarter of the Consumer Price Index is determined by changes in rents, which means that if even a small portion of new measures against landlords is passed on to tenants, it will affect our inflation rate, and inflation of "only" 4% will become something we look back on with nostalgia. Then there is the fact that the state itself is desperately trying to bring developers and financial institutions into the rental market, among other things with large tax breaks - purchase tax of just 0.5% for real estate funds that buy rental homes, a dramatic reduction in companies tax for developers that put apartments up for rent rather than selling them, and substantial subsidizing of land prices in tenders of the state owned company Home to Rent, only so that developers will buy the land for building apartments that will be rented for twenty years before they are sold to the highest bidder.
Time for reliable data
With all due respect to the Tax Authority’s figures, it’s also necessary to mention somewhat different figures published last week by the Ministry of Finance chief economist, according to which the change in the stock of investment homes (purchases minus sales) went back to being negative in the first quarter of 2022, with "the largest quarterly decline at least since the beginning of the previous decade." This followed the restoration of the lowest purchase tax bracket on investment homes to 8%.
How is the discrepancy between the Tax Authority’s figures (almost 20,000 more homes between 2017 and 2020) and those of the chief economist (a decline of a similar amount in that same period) to be explained, especially when both sources are in the Ministry of Finance? This highlights, once again, that one of Israel’s biggest problems is the inability to make decisions in reliance on contradictory and unclear official figures.
Perhaps that’s the only clear conclusion: the time has come that the State of Israel should know what’s happening in its rental market. What is the demand, what is the supply, and what are prices? And no, the monthly survey by the Central Bureau of Statistics sampling at least 18,000 tenants, which for the time being is indicating a very moderate rise in rents (0% in April, 3.4% in the previous twelve months) is really not enough.
Published by Globes, Israel business news - en.globes.co.il - on June 16, 2022.
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