Photo Credit: Sraya Diamant/TPS
Construction project at Neve Menachem neighborhood in Karnei Shomron. June 16, 2019

Israel’s Finance Minister Yisrael Katz is working to correct the damage done to Israel’s real estate market by the previous, and socially woke Finance Minister, Moshe Kahlon.

Katz announced he won’t be renewing Kahlon’s tax rates this week, a move which drove real estate investors out of Israel and helped stagnate Israel’s real estate market.

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Kahlon introduced two initiatives that damaged Israel’s real estate market, leaving it almost paralyzed for the past half decade.

Kahlon’s better know initiative was his flagship “Mechir L’Mishtaken” government lottery program for new home buyers. First-time home buyers hoped to win the chance to buy a slightly less expensive apartment built for the government by private contractors, who made minimal profit on the projects.

As could be expected, many of those government ordered apartments turned out to be less than appealing to buyers due to their quality, construction and layout. In fact, many lottery winners chose to not live in their apartments and instead rented them out.

More problematic was the damage the program did to Israel’s second hand real estate market.

First-time home owners found themselves unable to sell the starter homes they were living in and upgrade to larger homes, as fewer buyers were interested in purchasing those 2nd hand homes. New buyers were willing to wait years for a chance to win the lottery and move in. Mechir L’Mishtaken could take up to five years from lottery until delivery.

As could be expected, this caused a chain reaction going up the real estate ladder.

In addition, many construction companies had to also gamble and choose between building cheap government apartments for minimal profits, or normal, new apartments in a market with fewer active buyers.

Indications are that the new Construction and Building minister Yaacov Litzman is not planning to continue the Mechir L’Mishtaken program in its current format, if at all.

Kahlon’s less well-known initiative, but far more damaging brainstorm was to discourage local and foreign investors from buying apartments for investment and rental. He did this through taxation.

In 2015, Kahlon raised the purchase tax to a whopping 8%.

The results Kahlon achieved were exactly what he planned, investors stopped buying apartments in Israel, which he claimed would lower housing prices and free up more apartments. Investment purchases dropped from 30% down to 13%. In 2015, investors bought 30,000 homes in Israel, according to a Calcalist report. As a result of Kahlon’s initiatives, that number dropped to only 14,000 in 2019.

Investors took their money elsewhere, buying real estate in countries with friendlier taxation rates.

Under Kahlon’s tax rules, if a homeowner wants to buy a second apartment (for his children, retirement, vacation, or additional income), the second home is taxed at 8% from the first shekel, and then at 10% starting at 5.3 million shekels.

Kahlon’s decrees also negatively impacted potential new Olim. If a non-citizen bought a home in Israel and did not make Aliyah within the year, they too suddenly found themselves paying an 8% purchase tax. That pushed off home purchases by many potential new Olim.

With Katz’s expected cancellation of Kahlon’s decree, real estate purchase tax rates will drop from 8%, back down to 5% on up to the first 1.7 million NIS, then at 6% to 3.5 million NIS. It will only reach Kahlon’s 8% at 5.2 million NIS, and the 10% tax rate at 16 million NIS and up.

These are the purchase tax rates it was at before Kahlon’s intervention, when the Israeli market was appealing to real estate investors.

Katz hopes that by restoring the lower tax rates, real estate investors – Israeli and non-Israeli alike, will return to Israel, and all the new home purchases with fill up Israel’s coffers once again, and resuscitate Israel’s real estate industry.

He’s probably not wrong. With the financial challenges brought on by the Coronavirus crisis and Katz’s restoration of reasonable tax rates, Israel is a buyer’s market once again.

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