In its annual report published yesterday, the Bank of Israel casts doubt on the ability of government programs to bring down the cost pf housing in Israel. In the view of the central bank, these programs are unlikely to raise supply of housing, which it sees as the key to reining in prices. It also sees moves on the taxation side as having mixed results: the rise in purchase tax on investment homes taking investors out of the market and making more housing units available for owner occupiers, but at the same time it is reducing the supply of homes for rent.
"Home prices increased by 8 percent in 2015, with an increase in the volume of mortgages-a combination that indicates the dominance of demand. On the supply side, building starts also reached a high volume in 2015-about 48,000 residential units-but were not sufficient to supply the demand without price increases. Demand for dwellings remains high because there has not been a significant change in the background factors: the real interest rate, the unemployment rate, the rate of increase in wages, and the rate of increase in the population," the Bank of Israel's report says.
"In addition to these factors, demand is impacted by the public’s expectation regarding price changes, inter alia as a result of government programs: After the volume of transactions declined during 2014, it again increased from the end of that year, since with the bringing forward of elections, the legislative process for the “Zero VAT” and “Target Price” programs was halted. While the government did undertake to lower housing prices, it seems that the increase in purchase tax imposed on investors and the “New Format Buyer’s Price” program have not generated expectations for lower prices. The increase in purchase tax is acting in parallel on demand for owned dwellings and on the supply of rental dwellings. It is distancing investors from the market, thereby making it easier to purchase a single home, while at the same time reducing the supply of rental homes.
"The “New Format Buyer’s Price” program is an additional program that is intended to lower home prices for first home buyers. As part of the program, the government will grant a discount on the price of land and will lower the price of dwellings built on it. The program will not significantly increase the supply of homes, since it will come mainly in lieu of marketing land to contractors on the open market. In other words, the government will subsidize home prices without significantly increasing the supply. It is not clear how the program will affect demand. While families that had not planned on purchasing a home may choose to participate in a Buyer’s Price lottery in order to win the government subsidy included in the program, families that had planned to purchase a home may participate in the lotteries and wait to win one of them instead of purchasing a home on the open market. The overall effect of the program on the average price in the market or on the price of a home purchased by a family that did not win a lottery is thus unclear. If the program reaches a significant volume, it will also lower government revenues from the sale of land," this section of the Bank of Israel's report concludes.
Published by Globes [online], Israel business news - www.globes-online.com - on April 4, 2016
© Copyright of Globes Publisher Itonut (1983) Ltd. 2016