Last week, the government announced how it plans to deal with the housing crisis in Israel. The plan includes measures anticipated by the public, such as increasing the purchase tax for real estate investors, as well as some surprises, like a ban on short-term vacation rentals and exorbitant benefits for private homeowners.
Just before the final approval of the State budget and against the backdrop of soaring Israel real estate prices, Minister of Finance, Avigdor Liberman, Minister of Housing and Construction, Ze’ev Elkin, and Minister of Interior, Ayelet Shaked, presented the government’s new housing plan. This marks the first time since 2015 that the government has presented a comprehensive series of measures to address major residential real estate market problems.
Although the most important steps for the housing market’s future are actually long-term changes, such as investing in infrastructure and making structural changes in the planning system, the public is still very interested in these recent measures, which are all designed to have an impact in the near future.
Increasing the tax rate for investors will see the quickest results
According to the plan presented on October 31, the initial purchase tax level for those buying a second apartment (or more) will jump from 5% today to 8%. In fact, this is actually a return to the tax rate prior to July 2020, when former Finance Minister, Israel Katz decided to reduce it to 5%. Since the tax reduction, there has been a sharp increase in demand for apartments from investors. This past August, investors purchased about 3,000 apartments in Israel, an all-time record monthly high and an increase of 71% compared to August 2020.
While the tax increase that comes to cool off the burning market is expected to be implemented through what has been defined as an expedited legislative procedure, it did not come into effect immediately. This gap has two implications: firstly, within the two weeks or so between the moment the tax increase was announced until it actually comes into effect, there is expected to be an onslaught of buyers interested in quickly investing in property in Israel. Additionally, during the legislative process that will make the policy change official, there is always a chance for last-minute changes.
Tourists to Tel Aviv could lose half of their accommodation options
Another step in the housing plan that has aroused a great deal of public interest is a policy preventing the regular use of residential apartments as hotels – referring, first and foremost, to Airbnb apartments. The Ministries of Housing and Finance hope to return approximately 13,000 apartments to the market that are currently being used for short-term vacation rentals, 9,000 of them in Tel Aviv and its neighboring cities.
In addition to the apartment owners who depend on these short-term rentals as a high source of income, tourists will also suffer from this change in policy. Today, there are 9,000 hotel rooms in Tel Aviv and 9,000 Airbnb apartments. In the event that Airbnb apartment rentals are banned altogether, the supply of hotel rooms in the city will be literally chopped in half. At this point, however, the details are still fuzzy, and it is unclear exactly how the government intends on implementing the change.
Local residents will also suffer from policy changes in the housing plan
In a similar vein, the government also announced a ban on granting permits to use residential apartments for other purposes, such as offices, stores, clinics, or private daycare centers. Up until now, local municipalities have been able to grant a “permit for exceptional use,” which is valid for a period of five years but can be extended time and time again. During this period, properties zoned as residential can be legally used for other purposes.
If implemented, this move would see the return of thousands of apartments in the central region to the housing market over the next few years, when current permits would expire and not be extended. Here too, however, the policy would have negative implications. Most notably, hundreds of private daycare centers which are currently operating out of private apartments would be forced to shut down or move elsewhere. Closing clinics currently operating in residences may also create a problem, as many neighborhoods do not have commercial centers that can absorb these businesses, leaving entire communities without easily accessible medical services within walking distance or a short drive away.
Many criticize the plan for favoring the wealthy
The government plan also announced that private homeowners would receive many benefits in order to encourage them to split their homes to add a rental unit or separate space suitable for additional family members. This step aroused much interest as well as quite a bit of criticism. According to the plan, the government would issue permits to enlarge houses by 45 square meters, and the improvement tax on the additional construction would be reduced from 47% to 34%.
These two benefits have a total value of hundreds of thousands of shekels, which would be enjoyed by the wealthiest sector of society – those who currently own private homes and can afford to do construction to make their houses even bigger. Naturally, many accused the government of advancing flawed policies that would “make the rich richer.”
The government also announced a tax benefit for private landowners who exercise the existing building rights on their land within four years, another attempt to tackle the shortage of apartments. Those who begin construction during this period will benefit from a reduction in the capital gains tax from the highest rate of 47%, applicable in some cases, to 25%. Also here, the government only released a general statement, which would require detailed legislation in order to become official policy.
The new plan does not replace, but rather builds on existing plans
In addition to the steps outlined so far, the housing plan also includes those previously announced, such as the Target Price program initiated by MK Elkin, which is set to begin immediately after the budget is approved. This government subsidy program will grant first-time homebuyers a discount of up to 20% on apartments purchased in new projects to be built on State land.
Additional plans include MK Shaked’s alternative to the TAMA 38 plan, which aims to increase the implementation of urban renewal projects; an addition of 30,000 foreign workers to the construction industry’s labor force; getting the National Committee for Planning and Building of Preferred Residential Complexes (CPRC) up and running at full capacity, and eliminating excessive bureaucratic and regulatory barriers in the planning system.
The government intends to increase residential construction
The government also laid out quantitative targets for the next four years (2022-2025), including approving plans to build half a million apartments (at a rate of 125,000 per year), beginning the construction of 280,000 apartments (70,000 per year), and State land to be marketed to developers that would amount to a total of 300,000 new apartments (75,000 per year), of which land for the construction of 180,000 apartments would be actually purchased (45,000 per year).
To sum up, the best news about the new government program is that it actually exists. After a long period of chaos in the market which was only exacerbated by the political instability in Israel over the past few years, it’s good to know that the government is taking steps to deal with the housing crisis. Even after the new government was sworn in, many people predicted that it would avoid taking significant steps in the housing sector, but it seems that the skyrocketing prices over the past few months have left them with no choice.
What remains to be seen is how determined the government will be in actually implementing this plan – much of which depends on legislation – and, of course, how effective these measures will be in bringing down the soaring prices of housing in Israel.