Last month, during a session of the Knesset State Control Committee devoted to Israel’s “ghost” apartments,” a representative from the Central Bureau of Statistics dropped a bombshell.
Merav Pasternak, the deputy director of statistics for the government body, told the panel that the number of Israeli ghost apartments — apartments that sit empty most of the year — is not 40,000 as previously estimated, but 159,700.
“That is an astounding number,” the chairwoman of the committee, Shelly Yachimovich (Zionist Union), exclaimed.
Indeed so. Several experts consulted by The Times of Israel were surprised by the total and said they would like to learn more about the Central Bureau of Statistics’ methodology. If accurate, the figure would make Israel one of the leading countries worldwide in ghost apartments per capita.
The adjusted number is significant because apartments left empty by wealthy investors from abroad are a hot-button issue in many Western cities, including New York, Miami, London, Melbourne and Vancouver. In these cities, real estate prices have risen astronomically over the last decade, and critics point to these empty apartments as not merely a symptom, but often as a key cause, of the problem.
As a 2017 UN Report explained, in cities that are “prime destinations for global capital seeking safe havens for investments, housing prices have increased to levels that most residents cannot afford, creating huge increases in wealth for property owners in prime locations while excluding moderate- and low-income households from access to homeownership or rentals due to unaffordability. Those households are pushed to peri-urban areas with scant employment and services.”
The UN report decries the “financialization of housing” whereby hundreds of billions of dollars of global wealth are being invested in real estate and transforming real estate markets. “Massive investment of capital into housing markets and rising prices should not be confused with the production of housing and the benefits that accrue from it,” reads the report. “The bulk of real estate transactions of that sort do not create needed housing or long-term secure employment.”
But it is not just legitimate global capital that critics of the ghost apartment phenomenon decry. In many cases, these apartments are a vehicle for money laundering, they say. While the UN report does not cite money laundering as a key cause of this phenomenon, many mainstream news reports have done. “Why New York real estate is the new Swiss bank account,” read a 2014 New York Magazine headline on the topic. An article entitled “The Kleptocrat in apartment B” appeared in The New Yorker in 2016, while The New York Times titled a July 2017 report on the issue “When the empty apartment next door is owned by an oligarch.”
According to Bar Ilan University Economics Professor Avichai Snir, about half of all money laundered worldwide is done so through real estate and this statistic is remarkably consistent across countries.
In Israel, some observers believe, foreign investments — and not just legitimate investments, but some involving money laundering — may have helped drive up real estate prices in recent years. Others believe the numbers of such investors are too small to have a significant impact.
The newly adjusted figures presented to the Knesset committee showing four times as many ghost apartments as previously estimated would appear to give more statistical ammunition to those who see a link between soaring foreign investment in Israeli real estate and soaring Israeli housing prices. As Pasternak later elaborated at the Knesset committee session, however, the 159,700 total is more complicated and nuanced than it looks at first glance.
Why do prices keep going up?
Housing prices have risen 118 percent in Israel in the last 10 years, prompting a vigorous debate as to the causes and over whether the country’s real estate market has formed an asset bubble that is about to burst. (In recent months, there appears to be a slowdown in apartment sales, although even this is subject to dispute.) Most observers agree that low-interest rates and a slow housing bureaucracy have led to demand outstripping supply, but some critics, mainly on the left, see moneyed interests playing a role as well.
As Joint (Arab) List MK Dov Khenin said at a November 14 Knesset panel on ghost apartments, “the phenomenon of turning homes into assets is not just Israeli. This characterizes modern urbanism worldwide. The root of the phenomenon is ‘late capitalism.’ There is a massive amount of capital that is looking for things to invest in. This money comes to a city and changes the character of the city in very significant ways. It creates the phenomenon of real estate that is not for use but a very, very good way to preserve wealth and make sure it maintains its value.”
The newly adjusted total of 159,700 ghost apartments puts Israel near the top of countries worldwide in ghost apartments per capita.
Melbourne, Australia (population 4.5 million) — cited by the UN report as a world leader in this phenomenon — has 82,000 empty apartment units, according to the UN report. In London, another city cited in the UN report, there are reported to be 20,000 long-term empty apartments, with 200,000 across England. In New York City, one estimate puts the number of empty apartments at 55,000.
While each number cited above was obtained by different people using different methodologies, experts consulted by The Times of Israel were nevertheless astounded that the number of ghost apartments in Israel could be so high per capita compared to places that are considered global hubs for foreign real estate investments.
At the Knesset session, Shelly Yachimovich, the committee chair, asked Pasternak to break down the number. And on closer examination, the picture became a little more complicated.
In 62% of these cases, Pasternak elaborated, the apartment was either empty or only occupied occasionally. In 10% of the cases, the owner had died or gone to live in an old-age home. In 9% of the cases, the apartment was run down or abandoned. In 8.4% of the cases, the apartment was brand new or still being built. And in 8% of cases, the apartment was undergoing renovations. (The total adds up to 97.4% of apartments. The Central Bureau of Statistics did not specify the status of the other 2.6%).
This breakdown indicates that only 62% of the 159,700 apartments — or 99,014 — might be owned by foreign investors or Israeli investors who leave them empty.
Daniel Eisenberg, director of business development for IsraTransfer, a currency transfer company — many of whose clients are foreign residents seeking to buy apartments in Israel — further questioned what percentage of these 99,014 apartments are long-term empty apartments or apartments that happened to be empty at the time of the survey because the owner was seeking a new renter.
According to Pasternak, the survey was conducted by field workers who went from home to home in neighborhood after neighborhood to see if anyone was living there. The cities with the largest numbers of empty apartments, she said, were Jerusalem, Tel Aviv and Haifa.
At the same session, an Israel Electric Corporation worker said he only knew of 20,000 apartments throughout Israel that were barely occupied. However, he noted that his company had no way of knowing about apartments that weren’t connected to the grid at all.
‘Not enough information’
Bar-Ilan University economics professor Avichai Snir said there is not enough information to know how these 159,700 empty apartments, assuming this number is accurate, have affected housing prices in the last decade.
“First, we need to ask when did these homes become empty? If these are homes that have been empty for many years, the effect is minimal. In that case, these are just homes that are left unused for whatever reasons for a long period and, therefore, they do not affect changes in supply.”
But said, Snir, assuming these homes had become empty since 2008, it would be important to do more research to understand who the owners are.
“How many of these are new homes, sold to investors who choose not to live there (possibly overseas buyers, or people in Israel who own a few apartments but live only in one and keep the others for occasional use)? This may have had a significant effect on home prices, because this type of buyer tends to buy relatively expensive homes. This creates an incentive to build high-cost (and price) homes that are intended for the high-end market and reduces the number of homes in the middle-class market.”
Snir said that if many of these ghost apartments became empty after 2008, and especially if they are empty because the people who own them do not intend to live there, this could have been a significant factor in the spike in housing prices.
Money laundering and the high cost of living
The most contentious and highly politicized issue when it comes to ghost apartments is just how much of the last decade’s spike in housing prices is due to money laundering.
Articles on the topic in the Hebrew press have sparked heated debates in the comments sections.
“Most foreigners buy apartments here to launder money. The apartment prices here are not reasonable for the poor locals, only rich foreigners can afford them. For most people it’s too expensive and you get so little value for your money,” reads one of many similar comments.
“Seriously,” reads another on the same article. “There are 120,000 apartments sold in Israel each year but only 30,000 are new. You really think French people are raising the prices? Maybe it’s the interest rates, don’t you think?”
‘Switzerland for Jews’
Sam Antar, the former CFO of Crazy Eddie and a convicted felon, described to The Times of Israel in September 2016 how his family’s company had laundered money through Bank Leumi for over a decade in the 1970s and 1980s. Antar said he would go to the Bank Leumi USA offices in New York, where he would meet with an employee of Bank Leumi Israel. Antar would hand the employee a briefcase full of cash and, a day later, when Antar boarded an El Al flight for Tel Aviv, the briefcase would be waiting for him on the plane.
In 2014, Bank Leumi admitted it had conspired to aid and assist a minimum of 1,500 US taxpayers to prepare and present false tax returns to the US Internal Revenue Service by hiding income and assets in offshore bank accounts in Israel and elsewhere around the world.
According to a US Justice Department press release, Bank Leumi’s “criminal activity” spanned over a decade from at least 2000 to 2011, during which time Leumi also provided “hold mail” service for approximately 2,450 US accounts whereby bank statements were held abroad and not sent to the customer’s address in the United States. To avoid prosecution, Bank Leumi agreed to pay $400 million in fines to the US and New York State governments. A US government investigation into Bank Hapoalim and Bank Mizrahi is ongoing.
“Israel has been Switzerland for Jews,” Ronen Bar-El, an economics professor at Israel’s Open University, told The Times of Israel in the September 2016 article.
A source who asked to remain anonymous said recently that much the same “anything goes” atmosphere prevailed among French Jews at the start of the real estate boom about 10 years ago. Individuals who wanted to transfer undeclared income to Israel and use it to buy apartments in Netanya or Tel Aviv had little difficulty doing so. It’s become somewhat more difficult, experts say, since the US Justice Department investigations.
Asked to estimate what percentage of Israel’s housing boom was caused by tax avoidance or money laundering, several experts said it is very difficult to know, since money launderers, obviously, go to great lengths to hide what they are doing.
Moran Harari, director of the Israeli branch of the Tax Justice Network, a global NGO dedicated to researching the pernicious effects of global tax avoidance and tax havens, told The Times of Israel that she found the 159,700 number very surprising and that it behooves the state comptroller to investigate further, both to verify the statistic and to understand its implications.
Harari concurred that it is hard to estimate the scale of money laundering through real estate over the last decade but pointed to a few recent reports that suggest it is not negligible.
“It’s well-known that globally, real estate can be used for money laundering, which is usually done in creative and sophisticated ways. For instance, the person who wishes to launder money can open a company in a jurisdiction that allows him to hold bearer shares, meaning only the person who holds a physical piece of paper owns the company and his identity is not written in any record. The owner then injects money into these companies and the company purchases the real estate. A large number of homes owned by foreign investors in Israel are held in this way.”
In May of this year, the Israel Tax Authority signed its Foreign Account Tax Compliance Agreement with the United States, as well as the OECD’s multilateral Common Reporting Standard, which obligates it to share tax and financial information with other countries.
Harari said we may already be witnessing a dampening effect on foreign real estate investors in Israel as a result of these agreements, which require bank account holders to reveal the source of their income.
But only up to a point.
“The information Israel is supposed to share has to do with bank accounts, and the acquisition of real estate in Israel does not have to be connected to this information sharing,” she said.
Israel, said Harari and other observers, has a history of being a money laundering hub. Despite its commitment to these international agreements, Israel is still on the State Department’s list of countries that are at high risk for money laundering, Harari pointed out.
In its 2016 International Narcotics Control Strategy Report, the US State Department described Israel as a “major money laundering country.”
“Criminal groups in Israel, either home-grown or with ties to the former Soviet Union, United States, or EU, often utilize a maze of offshore shell companies and bearer shares to obscure ownership,” the report stated.
“Officials continue to be concerned about money laundering in the diamond industry, illegal online gaming rings, retail businesses suspected as money laundering enterprises, and public corruption.”
According to Harari, the 2008 law that gives a 10-year tax exemption and tax reporting exemption to new immigrants and returning residents, along with the fact that it has not been repealed, is one of the main factors making Israel a major money laundering country.
As the State Department report states, “Israel’s ‘right of return’ citizenship laws mean that criminal figures find it easy to obtain an Israeli passport without meeting long residence requirements. It is not uncommon for criminal figures suspected of money laundering to hold passports in a home country, a third country for business, and Israel.”
In addition, Harari pointed to two little-noticed government reports suggesting a strong link between real estate purchases and money laundering.
In 2013, the State Revenue Administration of the Finance Ministry found that about 20% of those buying apartments for investment purposes had monthly incomes of NIS 7,000 (about $2,000) or less, suggesting that they either had a lot of income that was unreported, or that they were buying on behalf of buyers who preferred not to reveal their identities.
Harari also cited an October 2017 report by the state comptroller who suggested that Israel’s shadow economy is driving up housing prices.
“The Tax Authority has not consistently taken the necessary steps to identify real estate investors who may have funded their purchases with black money, even though it has all the data,” the State Comptroller admonished.
“This raises the fear that a large amount of black money is being invested in real estate and that this money plays a role in the demand for housing.”