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No VAT On New Housing: How Will It Work?

By Shia Getter

Israel’s 0%-VAT plan, which would supposedly reduce real-estate prices by 15.5%, is to begin in September, but its details are still being smoothed out in the Knesset. Although the plan could present a helpful incentive to those who would be eligible—families, or individuals over 35, buying their first apartment—we have yet to see if the advantage will really pan out.

Criticism of the plan revolves around its limited application; the possibility that, should it be successful, it will draw buyers away from the country’s periphery; and the unfortunate reality that it may not work at all, either because developers will find a way to pocket the profit themselves, or as it will simply create a demand that cannot be met within the current bureaucratic confines.

Too Limited

To Be Effective?

The law has evolved since its original form and has made certain allowances to include those segments of the population that did not serve in the army or sherut leumi (offering them 0% VAT on apartments up to NIS 950,000). However, its limited applicability still discriminates against those who do not wish to or cannot purchase from a developer, and the plan would be much more effective—and fair—if it would be opened to those who own an apartment but are seeking to move.

On the other hand, the reason the bill only discusses developer projects is that the sale of a home by a private individual does not include VAT to begin with. That said, since the law would encourage buyers to consider new projects over previously owned apartments, this could theoretically force apartment sellers to lower their prices to match the competition.

However, limiting the benefit to first-time buyers and heavily restricting the eligible apartments (discussed briefly below) may interfere with any real impact the law could have on the market. Some real-estate and tax experts are concerned that its only impact will be to harm tax collection. And indeed, the government would have to consider other sources of taxation to make up for the loss of tax money from those apartments. While the original bill suggests raising VAT on all other products by 0.4%, a government assessor will determine if this is necessary in view of the other taxes imposed on real-estate transactions.

What About

The Peripheral Towns?

Many buyers look to the less-sought-after towns on the periphery of the country for affordable real-estate prices. Much national and private effort has gone into developing these towns into more attractive solutions for young families. However, an 18% discount means more money back per square meter in the more expensive cities than in the towns. There are many suggestions for tweaking the plan so that it will not discriminate against the peripheral neighborhoods, such as setting the VAT-back at a fixed number instead of a percentage. This would once again encourage periphery purchases.

Will The Developer Pocket The Profit?

As always, there is the question whether the benefit will actually reach the audience it is trying to benefit, or whether the developers will raise the bottom line and end up grabbing much of the discount themselves, turning what used to be tax money into their private profit.

The proposed law includes its own mechanism against this concern: The benefit will only apply to apartments that meet certain price requirements. Each area will be assessed as to its average price per meter, and to be able to sell VAT-free, the developer will have to keep his apartments at 95% of the average price. The assumption is that the increase in sales would make it worthwhile for developers to sell just under the average price per area, but again, would it be worthwhile to sell for less than average when only a fraction of his potential buyers can get VAT off?

Apartments selling for over NIS 1.6 million in total will not be eligible at all (limiting the application of the law still further).

Creating Unrealistic Demand

While 0% VAT looks like an obvious step in trying to lower apartment prices, will it work? Real-estate professionals, economists, and others see the plan as almost worthless, if not actually detrimental, without a simultaneous plan to increase supply.

Cutting 15.5% off the bottom line is a big incentive for new buyers, and will create a sharp rise in demand. Without supply to match, as soon as the law begins to apply, prices will balloon, as always happens when demand outstrips supply, worsening the very problem the law attempts to mend.

The only solid solution for lowering real-estate prices in Israel is for the government to lift its bureaucracy and open up more land for construction. A 0% VAT coupled with a lot more housing projects could indeed make home ownership affordable for more Israelis.

But does the government really want to lower real-estate prices? Keep an eye out for future articles. v

This article is intended only to provide general information about the subject matter covered.

Shia Getter is the CEO of the Shia Getter Group, a full-range real estate services firm in Jerusalem catering to the Anglo investor. He is a noted expert, columnist, and author of The Guide to Investing in Jerusalem Real Estate. He and his professional team manage many upscale Jerusalem properties and have helped countless people buy, sell, and renovate property in Israel.

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Posted by on July 10, 2014. Filed under In This Week's Edition. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.