Last week, Israel’s finance ministry broadly approved an increase in the purchase tax imposed on real estate investors, once again, to tax brackets of 8% and 10%. The aim of the ministry is to “deter” investors from buying investment apartments and to reduce demand in the residential housing market.
The government pushed tax hikes into fast-track legislation with minimal time for public comment in an effort to prevent investors from rushing to buy apartments before the regulations go into effect.
As you may recall, at the end of June 2015, then Finance Minister Moshe Kahlon decided to increase the purchase tax on real estate investors to 8% and 10% brackets, on the grounds that this measure would have the effect of “dissuading” investors. . In the aftermath of the COVID-19 crisis, in July 2020, then Finance Minister Israel Katz lowered the tax imposed on investors to its previous rates (i.e. tax starting at 5%).
According to the new bill, which resembles Kahlon’s 2015 strategy, the purchase tax on a second residential apartment will be 8% from the first shekel, up to a purchase price of ILS 5,348,565. . If an apartment costs more than 5,348,565 ILS, the tax imposed on the part exceeding the aforementioned purchase price will be 10%.
The Department of Economics of the Ministry of Finance recently published a review of residential real estate. It shows that in July 2021, investors bought around 2,600 apartments, three times more than the lowest level recorded in July 2020 and 80% higher than in July 2019. It is evident that the soaring prices of real estate since last year is mainly “blamed” on lower purchase tax rates imposed on real estate investors.
However, the ministry’s report also shows that investors don’t just buy apartments, but also sell apartments. Therefore, in the final analysis, the stock of apartments owned by investors has not changed much, so they may not be the main cause of the rise in apartment prices.
Experience has taught us that reducing investor activity in the real estate market by increasing the purchase tax on investment apartments does not help bring down apartment prices, which, contrary to projections, have continued increase even after the tax hike in 2015.
In addition, there was also a shortage of rental accommodation between 2015 and 2020. As the supply of rental apartments in the market is low anyway, the increase in the purchase tax has resulted in a significant increase in rents. Indeed, the people most affected by this approach are those who do not have the financial means to set up the initial capital allowing them to buy an apartment and are therefore dependent on the rental market. On the other hand, for investors who have the financial means to buy a second apartment, the tax hike will not be a major consideration in their decisions, since these investors will end up passing on their additional costs to their tenants.
The benefit of reinstating the purchase tax hike imposed on real estate investors will be infinitely less than the harm to state coffers, the real estate market and apartment tenants in Israel resulting from the repeated attempt to push investors out of the local market.
Foreign and local real estate investors are an extremely important component of the housing market in Israel. They are a positive factor in a robust and dynamic real estate market. They are pumping billions into state coffers and increasing the supply of rental apartments, which in turn slows down the upward trend in rents. It would have been better if the Ministry of Finance had given due consideration to these factors before deciding to increase the tax rate again.