New measures to halt Israel’s rise in housing costs may not be enough

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The Israeli government plans to raise the purchase tax on second homes from 6 percent to 8 percent, in one of six new measures aimed at stemming the rapid rise in housing prices.

The measures were decided on by Finance Minister Avigdor Lieberman, Interior Minister Ayelet Shaked and Housing Minister Zeev Elkin. They are meant to complement the government’s main strategy for keeping housing costs steady – making more land available for residential construction.

However, Shaked stressed that the goal is merely to stem the rise in prices, not to bring them down. And it’s not clear how successful any of these measures will actually be. For instance, with housing prices rising by about 10 percent a year, experts say the modest rise in the purchase tax on second homes won’t be much of a deterrent to property investors.

A second measure that is likely to prove highly controversial would prohibit homeowners in areas where housing demand is high – primarily the center of the country – from listing their homes for short-term rental through sites such as Airbnb. The idea is to force the owners to rent the properties for long-term residence, rather than as alternatives to hotels. The ban will not apply to popular tourist destinations in the periphery, such as Eilat and Tiberias, but it is expected to generate fierce opposition in Tel Aviv, where some 13,000 apartments are listed for short-term rental.

If it receives Knesset approval, this measure would also lead to the closure of many offices, clinics and law firms located in rented apartments in the center of the country. However, the ban would not apply to preschools, many of which are also located in rented apartments.

Room in an Airbnb apartment in Tel AvivAirbnb

The third measure would allocate 180 million shekels ($57 million) to encourage raze-and-rebuild projects for older apartment buildings in the periphery. However, experts say this is a drop in the bucket compared to the billions needed.

The fourth would encourage residential construction on privately owned land by slashing the betterment tax levied on such improvements from 47 to 25 percent for the next four years. After that, the rate would gradually rise over the next four years until it reaches 47 percent again.

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The fifth would encourage people to up divide their homes to create a separate unit, either for rental or for use by other relatives. The betterment tax for such splits will be cut from 47 to 34 percent, and owners will also be allowed to increase the size of their home by 45 square meters.

But this measure has been criticized as primarily giving handouts to the wealthy, since they are the only ones with homes big enough to be divided into separate units. It’s also not clear how much this will actually contribute to increasing the housing supply, since the wealthy don’t really need incentives to provide homes for their adult children or to increase their income by creating a rental apartment.

The sixth measure would streamline the process for obtaining building permits, making it more similar to the process in the United States.

Elkin also announced this week that his ministry would launch a new program, called “Target Price,” to replace the existing Mehir Lemishtaken program. Both were aimed at enabling people who meet the program’s requirements to buy their first homes at a subsidized price and thereby increase the supply of affordable housing.

Elkin said that up to 65 percent of all new apartments marketed by the state would be included in this program, but it would not apply to high-demand areas in the center of the country. The subsidized prices will be up to 20 percent lower than market prices, and the program will cost the government between 12 billion and 20 billion shekels.

As noted, however, all of these steps are supplementary to the effort to increase supply by having the Israel Land Authority market more land. Elkin said that so far this year, enough land for 74,000 homes has been put on the market and enough for 45,000 has been sold in practice. This is a significant increase over 2019, when land for 38,700 units was sold.

Andromeda Hill luxury housing project in Jaffa

The government’s goal is to market land for 180,000 apartments over the next four years and have construction start on 280,000 units during this period. But these are ambitious targets that will be difficult to meet. In 2019, which was considered a peak year, work started on only 55,500 units – a far cry from the 70,000 a year the government is aiming for.

Meeting these targets will require substantial streamlining of planning and land registration procedures; massive spending on the infrastructure needed to support new neighborhoods, such as transportation; and speeding up the relocation of army bases from the center of the country to the periphery. The government has set up a forum of ministry directors general, headed by the director general of the Prime Minister’s Office, Yair Pines, to work on streamlining the bureaucracy