A new Bank of Israel study published yesterday that examined the effect of the change in purchase tax on the behavior of homebuyers found that the general public is indifferent to small changes of up to 3.5% in the tax rate. The study was conducted by Neelie Ben-Tovim of the Bank of Israel Research Department under the title, "Estimating the Price Elasticity of Demand for Homes in Israel." In 2013, during the early days of the previous government, a purchase tax hike to 3.5% for all those upgrading their homes (rather than for only homes purchased from a given price) was proposed. It cannot be ruled out that this study was inspired by that proposal, which was never implemented due to opposition and public pressure.
As part of the study, the Bank of Israel examined all residential housing deals in 2008-2014, based on Israel Tax Authority figures. In accordance with the usual assumptions regarding individuals’ preferences, the number of home transactions is expected to be higher at the price at which the purchase tax rate changes. In other words, people will prefer to buy housing at a price below the price for which the tax was raised. The study focused on purchasers of a single apartment and on the movement from one tax bracket to another. Conclusions can also be drawn to some extent, however, about the purchase tax hike that went into effect almost a year ago, when the purchase tax for investors was raised to 8%.
The study's conclusions indicate that the public is almost completely non-responsive to the increase in the tax during the period of the study. It was found that the elasticity of demand from buyers of a single housing unit with respect to the price averaged -0.046%, the lower bound of the elasticities calculated in other studies in Israel and abroad. The Bank of Israel stated, "The elasticity found here is very low, meaning that individuals make only slight changes to their consumption of owned dwellings services due to small changes in price. A possible explanation for the low elasticity is that the change in the purchase tax rate is small, and many individuals may therefore not react to it at all."
The results mean that among the public's considerations in buying housing, including public transportation arrangements, the educational system, the environment, and other factors, the purchase tax element and its fluctuations at a 3.5% level of change have almost no effect on the purchase decision. In the case of the proposal three years ago to impose tax on those upgrading their housing, it can be concluded from the study results that raising the purchase tax would have had no effect on demand for housing.
At the same time, as far as the purchase tax hike to 8% for purchasers of a second apartment imposed by the Ministry of Finance in June 2015 is concerned, the results of the Bank of Israel study are likely to lead to the conclusion that in the tax brackets in which the tax increase was 3.5%, the effect on the market is probably negligible. A hint of this can be found in the study itself, which stated, "When the elasticities were calculated for relatively small changes in the purchase tax rates, a change from 3.5% to 5% for purchasers of a single housing unit and from 5% to 6% or 7% for investors, no additional transactions were found at the point of change in the tax brackets."
The study focused on purchasers of a first housing unit and those upgrading their housing. The Bank of Israel Research Department was unable to state unequivocally what the effect of a tax hike on investors, because its data were inadequate. "No behavioral response by investors to changes in the purchase tax they had to pay was found, but these changes were very small (only 1%), and conclusions based on them are therefore unreliable."
Published by Globes [online], Israel business news - www.globes-online.com - on May 31, 2016
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