The State of Israel has been struggling for more than a decade with a futile struggle in an attempt to lower housing prices. A fight she loses time and time again. In 2022, housing prices increased by more than 19%, and although during 2023 there was a slight moderation due to a high interest rate environment and political uncertainty, we are still in a price environment in which most of the population finds it difficult to buy an apartment.
The solutions tried so far have included attempts to increase supply through changes in planning procedures and subsidized marketing in lotteries between eligible groups determined according to criteria. The various marketing programs, such as "target price", "reduced price" or "occupant price", did not contribute in any way to lowering housing prices. It is possible that the opposite result was achieved: the plans led to the participation of part of the public on the demand side that, without their implementation, would not have purchased residential apartments. Increasing demand without increasing supply has therefore led to a further increase in the housing index. Apart from those who participated in the marketing programs and won them, the general public only suffered from further price increases.
Tax policy may certainly affect the prices of products and may achieve social goals, but the State of Israel's tax policy with regard to real estate has achieved goals opposite to those required. Misunderstanding, archaic and populist attitudes have had the opposite of what was expected.
What taxes can the state intervene to influence housing prices?
Capital gains tax – applies to the profit from the sale of the property. In Israel, the capital gains tax rate on residential apartments ranges from zero to 25% depending on the date of purchase of the apartment, but most sales are exempt from tax due to the rules exempting the sale of a single apartment. Therefore, a tax rate close to zero actually leads to investment distortion. Such a low tax rate on profit from the sale of an apartment leads to a bias in the market in favor of investments in residential apartments, and the benefit inherent in almost zero tax rates drags many investors into the residential market.
Construction of new apartments in Kiryat Ono (archive), photo: Yehoshua Yosef
Apart from the fact that such a low tax rate leads to an increase in the market value of residential apartments, it is worth addressing the injustice inherent in imposing such a low tax on profit from the sale of an apartment. This profit does not originate from work or investment, and it grows against the background of the distress of the other consumers in the market. The impossibility of satisfying demand as land is a limited resource leads to a housing shortage. It is the plight of the homeless that leads to additional value and profits for homeowners. Leaving the profit without imposing a tax as is customary to impose on any other profit, including profits from work, which is subject to a tax of 50%, is unjust and leads to a deepening of social gaps, which are deepening at a high rate in Israel.
Tax on residential rents is also low to none. An apartment owner who rents out his apartment is exempt for his income from rent up to NIS 5,500 per month or at the landlord's choice, at a rate of only 10% of the income turnover. In this regard, too, such a low rate of tax, compared to any other income in the economy, leads to the entry of investors into the field and will lead to an increase in the value of the property, due to the embodiment of the benefit.
Property taxes that existed in Israel were abolished in 2000, but in many countries around the world it is customary and has social and economic justifications. According to this tax, it is mandatory to pay at fixed times, payments at a fixed rate out of the value of the property. The increase in the value of assets is the result of social and political changes, and the imposition of a tax that is a derivative of value leads to a reduction of social gaps and a correction of the injustice inherent in the ownership of real estate assets.
In conclusion, the increase in the housing index is due to an excess of demand over supply. Tax policy must take into account market elasticity and the ratio of supply to demand. Under extreme conditions of excess demand over supply, tax policy should be examined in a completely different way than decision makers have done to date. The State of Israel's tax policy in the field of real estate has led to an unjustified increase in housing prices and to a deepening of social gaps. It is worth reviewing our entire tax policy.
It is possible to change the real estate map, change home prices, and reduce or at least prevent widening gaps in Israel.
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