Real estate market players did not conceal their joy at the news that Minister of Finance Israel Katz intended to lower purchase tax for buyers of residential properties for investment. The move is indeed an extremely important step that will have both direct and indirect effects on the real estate market, and all working in one direction: higher turnover of deals.
Purchase tax is a graduated tax. For the buyer of a sole home, it starts at zero for a property costing up to NIS 1.74 million. On a purchase price higher than that, the tax starts at a rate of 3.5% on the excess, and the rate rises in steps according to the price. Buyers of residential properties for investment, on the other hand, pay tax from the first shekel of the purchase price, at a rate that has more than doubled in recent years.
It started with Yair Lapid, who, as minister of finance, raised the purchase tax rate for investors from 3.5% to 5%, and it continued with his successor, Moshe Kahlon, who five years ago imposed a 60% rise in the tax rate on investors, so that it started at 8%.
For investors, 8% is nearly three years of the rental return on the property. Given an average price of a home in Israel of NIS 1.6 million (according to the Central Bureau of Statistics), the amount of tax charged on such a home under the Kahlon tax regime is NIS 128,000, which compares with NIS 80,000 under Lapid, and NIS 56,000 beforehand.
Investors did their sums, and many turned to other forms of investment, among them real estate overseas, and offices in Israel. Their share of the residential real estate market fell from 25% before Kahlon's time to 13% in the past few years, meaning a loss of 10,000 potential homes annually, of which 4,000 would have been new homes built by the construction companies, amounting to 10% of their annual sales in the past few years, a significant proportion.
The decline in sales to investors made it difficult to promote construction projects and to obtain bank finance. Developers who nevertheless insisted on selling to investors had to compensate them for the higher purchase tax with discounts in the tens of thousands of shekels on the price of an apartment.
There was also an indirect but no less important effect on the market: most homes bought by investors are not new but secondhand. When an investor buys a home, he or she releases the owners to move upmarket and buy their next home.
Kahlon's measures - taxation of investors, and the Buyer Fixed Price program - led to a situation in which would-be "move-up" buyers were stuck with their existing homes, which meant that developers were stuck too. When the purchase tax on investors is reduced, they will return to the secondhand home market, enabling the owners of such homes to progress to a new apartment, thus stimulating the construction industry.
The marketing departments of residential real estate companies are now presumably working round the clock to design new plans. The coronavirus pandemic, the expected tax cut, and the massive crisis in the office market, are factors likely to bring thousands of investors and billions of shekels their way.
Published by Globes, Israel business news - en.globes.co.il - on July 14, 2020
© Copyright of Globes Publisher Itonut (1983) Ltd. 2020