Cabinet okays tax-free homes for first-time buyers

Tax breaks, ‘target prices’ approved in effort to reduce housing costs for young families; Bank of Israel governor unimpressed

Haviv Rettig Gur is The Times of Israel's senior analyst.

A building site in the Gilo neighborhood in south Jerusalem, October 2, 2011. (Uri Lenz / Flash90)
A building site in the Gilo neighborhood in south Jerusalem, October 2, 2011. (Uri Lenz / Flash90)

A cabinet committee approved on Monday two measures that ministers hope will lead to a drop in housing prices for first-time buyers.

The first measure, proposed by Finance Minister Yair Lapid, who chairs the Ministerial Housing Committee, would eliminate the 18% value-added tax for families buying their first apartment, as long as the apartment is new, costs less than NIS 1.6 million ($460,000) including VAT, and the deal is finalized after the new rules take effect.

The proposal passed unanimously in the cabinet committee.

“The plan includes 0% VAT on a first apartment for a young generation that serves, works and pays taxes,” said Lapid shortly after the decision. “What does that mean? It means that the tables have turned. The state of Israel decided today that it’s going to stop profiting off the children of the middle class. Instead, it will help them buy an apartment at a reasonable price.”

Buyers will not be allowed to sell an apartment that receives the tax break within five years of the purchase, the Finance Ministry noted in a statement, a restriction meant to prevent speculation in the cheaper housing.

A second measure approved by the cabinet committee on Monday, which was proposed by Housing Minister Uri Ariel, Prime Minister Benjamin Netanyahu and Lapid, called for a change in government housing tenders that could have a dramatic effect on the cost of all new housing. Currently, tenders to build housing on public land are won by the contractors who can pay the state the most for the land. Under the new rules, contractors who commit to low final-sale prices — 20% lower than market value at the end of 2013 — will be eligible to receive the state land at a reduced rate.

“The state will set a ceiling for the cost of apartments built [as part of] government-sponsored projects,” Netanyahu said Monday about the measure. “All contractors will get [state] land at lower prices if they guarantee lower final-sale prices,” he promised.

A new committee chaired by the finance minister and including the housing minister, the Prime Minister’s Office director general, the director of the Israel Lands Administration and other senior officials, will draft the new tenders, dubbed “target price tenders” by the Finance Ministry. The committee is charged with completing its work and presenting new state tenders under the new rules within three weeks.

Bank of Israel Governor Karnit Flug, who attended the ministerial committee meeting Monday, warned that some elements of the new measures were likely to have negative consequences. She noted specifically that the sudden lowering of housing costs would create a spike in demand, which would likely increase the cost for those ineligible for the benefits — and even for the eligible would effectively transfer much of the savings from the buyers to the contractors.

The cabinet committee also approved a broader government study into possible regulatory interventions in the rental housing market to keep prices from rising quickly, and Treasury grants to local governments that show an increase in certain categories of new housing construction.

“Prices will fall because we’re continuing to work together, continuing to think outside the box, don’t fear new solutions just because we’re more familiar with the old ones, and remain focused on the only really important thing: an entire generation that is watching us and expecting us to work for it,” Lapid said.

Ariel offered similar praise for the two measures.

“I believe we can bring about real change in the housing prices in Israel and make owning an apartment accessible to young couples and those who want to improve their living conditions,” he said.

Expanding the supply of new, low-cost apartments “is the necessary condition for influencing the cost of housing in the entire housing market, including second-hand apartments that make up 75% of all [home sales] in the economy,” Ariel added.

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