The measures aimed at lowering housing prices that Minister of Finance Moshe Kahlon is promoting will only raise prices and create a real estate bubble, former Ministry of Finance chief economist Michael Sarel asserts. Sarel resigned his position in protest against the plan by Yair Lapid, the previous Minister of Finance, to grant apartment buyers an exemption from VAT. According to Sarel, lowering land prices and housing prices through buyer fixed prices will increase demand for housing and make it more expensive, exactly like an exemption from VAT. Sarel also criticizes the plan to raise purchase tax for investors, and says that there is currently no discrimination between real estate investors and capital market investors, and that higher taxes on investors will only decrease the number of apartments for rent, and will not make it easier for young couples looking for an apartment.
The interview with Sarel was conducted shortly before the publication of a status report by the Kohelet Policy Forum, where he is currently a senior economics researcher. Although he agrees that housing prices in Israel are at a historic high, especially in Tel Aviv, he believes that because of the low interest rate, it is now significantly easier to buy an apartment than it was at the previous peak in housing prices in 1997.
Sarel: "It's much easier to buy an apartment today than it was 20 years ago, and it isn't even harder than it was 10 years ago. There are two factors in buying an apartment: the down payment and the mortgage. If you compare the down payment required and the mortgage payments as a percentage of disposable income, both elements are lower than they were 20 years ago. I draw your attention to the fact that real prices declined in 1997-2007, so that even if you compare with 1997, housing today is more expensive now, but not by 80% or 100%, but by less. Household income has also risen.
"If we assume that the down payment is half the cost of an apartment, then it is less than what it was 20 years ago, and the mortgage payment is much less - almost nothing, compared with what it was 20 years ago. You can get a mortgage today with payments that are almost a quarter of what they were 20 years ago. On the other hand, the down payment required now is much higher than it was 10 years ago, but the mortgage payments are much less, so it more or less balances out.
"The index of the number of monthly salaries needed to buy an apartment is currently at an all-time high of over 130. This index, however, is of questionable value. First of all, the figure of 130 monthly salaries doesn't take into account that there are more people employed now, and there are therefore more salaries per household (the average salary is falling - A.B.). Secondly, this index is based on gross salaries, but net salary has risen much more than gross salary. Thirdly, comparisons are being made to 2007 or 2008, but the number of salaries needed to pay for an apartment has fallen since 1997. It doesn't look good in the press to say that it's less difficult to buy an apartment than it was 20 years ago, though. They say that young people in Spain need fewer monthly salaries to buy an apartment than young people in Israel, but that's meaningless; half of the young people in Spain have no salaries, because they have no jobs."
Globes: But the prices are very high, and if the interest rate rises, the situation will become difficult.
"That's obvious. I'm very worried about housing prices and the macroeconomic effect of a drop in housing prices. From a historical perspective, housing prices are very high, especially in Tel Aviv. When you compare housing prices to per capita GDP and population density, you find that they are far higher than in important cities around the world. The ratio of mortgages to total credit is also relatively high, so you can see that there is a bubble.
I don't think that it's a huge bubble like it was in the US in 2006, but it's not far from that. There's therefore no doubt that housing prices will fall. The question is whether it will be slow and gradual, as it was in Israel in 1997-2007, or a 40% crash like in the US in 2006-2009. Measures are therefore needed to moderate the expected drop in housing prices."
"The question is whether to simultaneously pursue a policy that further increases demand and the bubble in real estate prices, such as subsidizing land prices, zero percent VAT, or a buyer fixed price - all of these things increase the demand for housing. They inflate the bubble. They cause some who wants to buy a 100-sq.m. apartment to buy a 120-sq.m. apartment, because there's a big bargain now, and you can get an apartment more cheaply. That's the exact opposite of good policy. The motive for it can only be political or misunderstanding of the causes for the rise in housing prices." Another mistake advocated by Kahlon, according to Sarel, is raising the purchase tax for investors (meaning for those buying an apartment which they do not plan to live in). "Globes" reported that the Ministry of Finance is discussing the possibility of levying a uniform 20% tax instead of the current 5-10% graduated tax. This measure is supported by the Ministry of Finance budget department, which says that it is aimed at depressing market demand. Kahlon says that in this way, he is helping young couples having to compete for apartments with investors. For its part, the Israel Tax Authority is advocating elimination of the tax exemption for those leasing apartments for up to NIS 5,000 a month. The argument for cancelation of the exemption is that there is no justification for discriminating in favor of apartment owners, as opposed to shareholders and bondholders, who pay tax on the dividends and interest they receive on their investments. "These measures result from misunderstanding, not bad intentions," Sarel says.
The argument is that investors in apartments enjoy lower tax rates than investors in shares.
"There was once discrimination in favor of investors in apartments, compared with other investments, but the betterment tax exemption has since been eliminated, and the purchase tax brackets were raised - there's no longer any difference. Shareholders pay capital gains tax and tax on dividends, but there is no purchase tax for them, so in general, it cancels out. People always want to increase taxes on investors, because they believe that it will reduce the demand for apartments and make apartments available to young couples. Because almost all the apartments bought by investors are leased, however, it won't reduce the demand for housing purchases. When you push the investors out of the market, you also push out those supplying housing solutions for renters, and they demand for apartments will therefore not fall. The proposal to eliminate the exemption on leasing apartments for up to NIS 5,000 is also dubious, because when you increase taxes on leasing, it will be less worthwhile to lease, and the number of empty apartments will only increase. There's also schizophrenia here on the one hand, they want to encourage leasing, while on the other hand, they're doing everything they can to do away with rental apartments. It's impossible to understand this logic."
Published by Globes [online], Israel business news - www.globes-online.com - on May 31, 2015
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