Bid to make housing affordable sends buyers scrambling, but will it work?
Finance Minister Kahlon’s purchase tax hikes go into effect on July 1, so there’s a rush to get deals done by then. But experts aren’t sure his plan will really help first time buyers

Finance Minister Moshe Kahlon rolled out the first stage of his plan to improve Israel’s housing market this week, with the hope of driving out big-time investors and getting more middle-class Israelis into their very own homes.
Reducing skyrocketing housing prices was the cornerstone of Kahlon’s election campaign. “We will care for the middle class,” he promised in his election night speech.
Since 2008, home prices in Israel have increased by 67 percent. In parts of the country that figure is even higher, making homeownership an impossible dream for most Israelis.
The price of a home in the northern city of Haifa, for example, was on average NIS 583,000 ($152,700) in 2008, but that figure rose to over NIS 1.1 million in 2015 ($288,126), a 91% increase, according to the Israeli Central Bureau of Statistics. Prices in Tel Aviv also rose by almost 84 %, from NIS 1.1 million to nearly NIS 2 million ($523,865).

Kahlon’s overall approach to bring down housing prices is two-pronged and simple — in theory. Drive down demand, increase supply.
The reforms the Finance Ministry has rolled out deal mainly with the former, particularly with regards to changes in purchase taxes.
The idea is to discourage people from buying vacation homes or multiple properties as an investment, and allow young couples to enter the housing market.
The current purchase tax system works like this: Israeli citizens pay no taxes on their first property so long as it costs less than NIS 1.57 million ($411,235). Above that, the rate can range from 3.6% to 10%, depending on the price.
Unlike with first properties, however, there is no minimum requirement for second homes. Even relatively cheap second (and any additional) homes and investment properties are currently taxed at anywhere from 5% to 10% relative to their price.
Under Kahlon’s plan, which goes into effect on July 1, taxes for second properties will increase dramatically. Properties up to NIS 4.8 million ($1.26 million) would carry an 8% tax, while all properties above that would be hit with a 10% tax.
That means that in two weeks, a NIS 1 million apartment will cost NIS 30,000 more than it does today; a NIS 5 million shekel apartment will cost over NIS 100,000 more.
This, again, will not affect Israeli citizens’ first apartments. Those tax rates will remain at their current levels.
Currently, Israelis have 24 months to sell their previous home after buying a new one before that new home is considered a second property and taxed accordingly.
Beginning July 1, however, they will have just one year to hand over the keys of their house or apartment to a new buyer before getting hit with the second purchase tax.
These changes have already sent real estate investors and vacation home buyers into a scramble.
A rush to buy
“It’s crazy. Just this morning outside of our office there was a line around the corner of buyers. This is something that we’ve never seen,” Uri Shavit, an owner of the real estate company Shavit-Engel, told an Israeli financial newspaper.
Though it’s too soon for exact figures of property sales since the announcement of Kahlon’s plan, Alyssa Friedland, a broker and owner of Re/Max Vision, a Jerusalem real estate firm, provided even more anecdotal evidence to suggest a concentrated surge in home buying.
“We had a Nachlaot deal,” she said, referring to a neighborhood in Jerusalem, “a NIS 6.75 million deal, an American bought the property, a renovated villa. They closed the deal within a week after negotiating a price in order to have the advantage of closing before the change.
“Another deal that is still being worked out involves an older couple moving to Israel. They are purchasing two apartments, a NIS 3.5 million ($1.75 million) apartment for them and a NIS 4.5 million apartment ($1.18 million) for their children. The agreement is slated to be signed by June 25,” Friedland added, less than a week before the tax change goes into effect.
Their first apartment will not be affected by the new taxes, as they will be purchasing the apartment as Israeli citizens.
If something goes wrong in the signing and delays the purchase past July 1, however, “they’re going to have to pay on that second NIS 3.5 million property a huge purchase tax.”
She added, “We are really pushing big time, and the attorneys are even pushing big time. It could be another NIS 300,000 in tax.”
Foreign buyers beware!
Kahlon has also slashed in half the period of time that homeowners have between purchasing a new home and selling their old property.
These changes may also discourage foreign buyers from purchasing higher-end apartments in Israel.
“I think foreign buyers are going to start buying smaller properties,” Friedland said, “because the higher percentages of purchase taxes come in at the luxury level — over the NIS 4 million range ($1 million).”
This could further encourage potential buyers to look for loopholes in the system. Foreign buyers looking for a vacation home, who have sons or daughters living in Israel, for instance, could put the property in their child’s name.
“A lot of our foreign buyers have kids who live here,” Friedland said.
So long as their Israeli children do not already own property, they may be able to avoid paying taxes altogether, if the apartment costs less than NIS 1.57 million, or pay at a much lower rate, if the apartment is higher end.
Even native Israeli buyers could put property in their children’s names to avoid paying Kahlon’s higher taxes.
Friedland has a theory, however, that the new tax law could have an unforeseen effect as foreign Jewish buyers look for the best deal on a luxury apartment — immigration to Israel could increase.
New immigrants pay a greatly reduced property tax rate, especially on luxury apartments. Foreigners who buy an apartment and pay the taxes for it would receive that money back if they get Israeli citizenship within the next year, Friedland explained.
But cases like these are not the true focus of Kahlon’s plan. Vacation homes in Israel are not what’s driving up housing prices in Israel. The true goal of the plan is to disincentivize the real estate investors who own and rent out dozens of apartments.
By ratcheting up the tax rate, the finance minister hopes to make real estate a less profitable model for investors and therefore more accessible to middle-class buyers.
Too soon to tell
At this stage, not everyone is convinced that his plan will work, while others believe that it’s too soon to tell.
Nehemia Shtrasler, an economic writer for the Israeli financial newspaper TheMarker, lamented Kahlon’s plan, finding it “disappointing,” in an editorial this week.
“The problem is there is no one in the Knesset who will say: The emperor has no clothes,” Shtrasler said.
Kahlon’s plan does too little, he explained, and does not address the true root of the problem — bond rates.
Though the two may seem unrelated on first glance, in fact economists judge the value of a property by its earning potential compared to how much someone could make with a similarly priced bond.
Bonds are normally used as a comparison as they are one of the more stable, less risky investment opportunities.
For example, if by renting out a NIS 1 million apartment one would earn NIS 100,000, and by purchasing a NIS 1 million bond, one would only earn NIS 50,000, then the choice is clear.
In recent years, the return rate on bonds has dropped dramatically. In 2006 an investor could get over a 5% return on a one-year bond. Last month the return was just slightly over 0.08%.
After a full year, a NIS 1 million bond would yield its owner just NIS 848.73. Renting out a NIS 1 million apartment is clearly the better financial decision.
Unless other, better options are made available to investors, Shtrasler and others have argued, Kahlon’s added tax won’t truly change the housing market. In fact, some have proposed that property owners will likely pass on the added cost of the tax directly to their renters, worsening the situation of the middle class.
Not everyone, however, is so quick to judge. As this is just the first of several steps the government hopes to roll out in the coming weeks and months, many economists are loath to speak out for or against the plan.
Until the rest of the details for Kahlon’s plan come out, it will be difficult to judge how effective it will be, several economists opined.
In the meantime, foreign and local investors and homebuyers will have to try to beat the clock, negotiating and signing property deals before the end of the month to avoid getting hit by the new taxes.
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