Several worrying numbers have been published recently about the housing market in Israel, but one of the most worrying figures is about the housing rental market. According to the Central Bureau of Statistics, the housing services index, which reflects the change in rental prices, records average monthly increases of more than 0.5%. When you add to that number the fact that the long-term rental industry is dying and private investors are selling off the apartments they own – the picture looks bleak. Besides the alarming data, the most controversial thing about this market is that the government is procrastinating in dealing with the emerging problem.
Today, more than ever, the rental market needs to be examined from a comprehensive macroeconomic perspective, given that rent is also a major factor in the CPI – which comprises a quarter of the index – and the housing services index rose 6.7%. Last year, higher than the overall inflation rate of 5%.
In the first decade of the 2000s, the state did not engage in the rental sector, while since the social protests of 2011 it has been working to restrict the participation of investors in the market.
The government’s actions followed the rapid increases in housing prices at the end of the 2000s, when apartment prices rose by more than 50% in 3 years. The government then tried to take some quick steps to bring down apartment prices.
Investors leave, but home prices don’t go down
The theory formed in 2011 by the Finance Ministry, under the direction of then-Finance Minister Yuval Steinitz, was that apartment prices rose due to a lack of housing supply. It was said that investors were competing with young couples for apartments, and since they had more resources, they were buying apartments at higher prices.
In those days the investors were really in control of the market, and they made up more than 25% of the entire market. So the theory seemed logical and had other advantages. It had a political expediency that blamed sharp price increases on potential government failures on “greedy investors”. The solution was also relatively easy to implement, mainly because it required an increase in property taxes for investors.
The Ministry of Finance has implemented a series of measures aimed at making the purchase of apartments unfeasible for investors, by increasing the purchase tax when buying an apartment and canceling the improvement tax benefits when selling it. At the same time, government figures used harsh language to condemn the investors.
This was the case with Steinitz, as well as with his successor Yair Lapid, who raised taxes again, feeling that Steinitz did not raise them enough. The share of investors in the market decreased, but apartment prices continued to rise.
Related articles
Rising input costs are putting more pressure on the housing market
Tel Aviv has 29% of the new unsold homes in Israel
The gap between supply and demand is still huge.
Home prices are still rising in some areas of Israel
Then came Kahlon but prices kept going up
In 2015, Moshe Kahlon became Minister of Finance. He did exactly what Steinitz and Lapid did, with much more force. And raising the purchase tax on investors to 50%, which further reduced the role of investors in the market.
But Kahlon was not satisfied with this matter and repeatedly blamed the investors for the price hike. He attempted to enact new legislation on higher taxes for owners with one or more properties, and it was overturned by the Supreme Court.
However, investors understood where the wind was blowing. In an environment of high taxes, possible new taxes and constant attack from politicians, they started selling real estate. During Kahlon’s tenure as finance minister between 2016 and 2020, investors sold thousands more apartments than they bought.
But the government plan failed. Barring a very brief drop in prices between the end of 2017 and the end of 2018, home prices have continued to rise. Although getting investors out of the market worked to a large extent, in practice the results showed that the theory that investors were pushing prices up was wrong, and this had dire consequences for the rental market.
Long term rental is not currently suitable
Kahlon and his successors absolved themselves of the need to engage with the current rental market when they came up with the idea of encouraging corporations and funds to get into the long-term rental business. This is trying to solve today’s problems with solutions of tomorrow, which will begin to affect the market only when more than 100,000 such apartments are built. This day will not come for at least another decade, so it is irrelevant to the problems of the current rental market.
At the end of 2020, Finance Minister Yisrael Katz decided to lower the purchase tax for investors. Investors returned to the market and bought about 5,000 apartments added to the pool of rental apartments. Apartment prices began to rise at the same time, perhaps regardless of the move.
Katz’s successor, Avigdor Lieberman, came to power at a time when housing prices were accelerating, so the first thing he did was raise the purchase tax to the levels of Kahlon’s days. The result – in 2022 more than 6,100 apartments will be withdrawn from the inventory of apartments for rent. The current Finance Minister, Bezalel Smotrich, has not changed the purchase tax, and during his short tenure in January and February of this year, more than 600 additional apartments were taken off the rental market.
The effect of all this on the increase in apartment prices was zero, and it is not accidental. The investment apartment market in recent years is not like the market it was before the Kahlon period. If it was once possible to say that investors are detrimental to the supply of apartments to the rest of the market and especially to young couples, today this argument disappears, because investors sell more apartments than they buy, that is, they contribute to the supply of apartments. Apartments. Not just that. The sharp increases in home prices occurred from 2021 to 2022 after Lieberman raised the purchase tax, and investors left the market again.
The data shows that the government’s handling has been wrong
The data refutes the entire way of thinking that guides the government’s dealings with the investment apartment market, but until today it does not seem that anyone in the Ministry of Finance would dare to question or reconsider the validity of this theory and the price. It is paid by investors and those in the rental market and economy.
And the price is going up more and more. The demand for rental housing is increasing, as rising apartment prices and rising interest rates have reduced the demand for apartments. And those who do not buy an apartment resort to the rental market. The acceleration of the urban renewal industry also contributes to a significant increase in rental demand from evicted tenants. However, the government still ignores this market, devoting most of its time to dealing with apartment prices.
Published by Globes, Israel business news – en.globes.co.il – on May 1, 2023.
© Copyright Globes Publisher Itonut (1983) Ltd., 2023.