Lapid’s attempt to bring down property prices: no VAT on first time buyers

Yair Lapid, Israel’s Minister of Finance, recently declared that he would cancel Value Added Tax (currently 18%) on new apartments for first time buyers under certain conditions, listed below. If approved – against the wishes of the finance ministry itself, the chief economist of which resigned over this proposal – this could cause a more immediate dampening of the lower to middle end of the real estate market and have a direct effect on the second hand market too.

To clarify: every purchase from a developer of a new apartment whether on paper or already built includes within the purchase price a VAT payment of 18%. So if the stated total purchase price in the contract is 1,600,000 shekels the actual price is 1,355,932 shekels plus VAT of 244,068 shekels. If the payments are spread out over time, as they usually are if the apartment is not yet completed, each payment will have the VAT added at the going rate on the day each payment is actually made.

Lapid’s proposed exemption will allow Israeli resident couples who have one child or more, where one of the couple has served in the army or done national service, to purchase their first ever property from a developer and not be liable for the VAT. The buyers must undertake not to sell the property for 5 years or the tax will have to be paid back with interest and penalties. The maximum rate will vary from region to region but the actual method of calculating what the maximum rate will be in each area is not yet clear.

The law will have to be drafted carefully to ensure that developers don’t just keep the prices the same and pocket the difference themselves although that may not be possible to do. There will also have to be a mechanism for oversight to ensure the apartment is not sold for 5 years as the VAT authority and the land tax authority are separate bodies.

This exemption has been proposed numerous times in the past but has always been shot down, mainly due to the financial loss the government will suffer which is claimed to be in the region of 3 billion shekels. Seeing how the daily headlines decry the rising costs of residential properties and how the government and particularly Lapid and his party who were voted in to make buying real estate easier have failed to do so, populist declarations and exemptions are being bandied about to show that the government is doing something/anything and this is just one of a number of trial balloons being floated. A political firestorm has been set off by to this proposal between Lapid and his people on the one side and between the higher echelons of the finance ministry, the other political parties in the government, the Bank of Israel and the Prime Minister himself on the other side who all seem to be against his proposal.

My prediction is we will see a large drop in volume in on paper and second hand purchases over the next few months as people sit on the fence to see how this proposal plays out. No one is going to spend an extra 200-240,000 shekels if they can wait to see if they will be exempt from this cost fairly soon and other buyers may well wait to see if overall prices come down as a result of this change. The second hand market will have to price itself accordingly if it is now competing with new builds that are more attractive and yet are cheaper for certain buyers due to this exemption. On the other hand if the proposal goes through this may well increase interest on the demand side which is the opposite of the stated intent of dampening demand and increasing supply, although it is limited to those people who the government – and especially Lapid’s party Yesh Atid – were voted in to assist.

There are still numerous longer term suggestions out there, some of which have already been implemented, relating to overall supply of land held by the government, revamping the planning process, oversight over sale prices and rentals, encouraging buying in the periphery and not the center of the country, persuading private landowners to develop or sell, increasing competition for building materials and supplies, increasing capital gains tax over time, limiting variable mortgages, increasing interest rates and heavily disincentivising investors and foreign buyers from purchasing properties. There are also discussions taking place on further increasing the purchase tax rates on investors.

Some of these reforms will take years to have an effect on the market. A huge drop in the real estate market could lead to a massive drop in tax revenue, the bankruptcy of building companies and possibly even some banks in the worst case scenario which would be contrary to the governments aims. This proposal could be a boon for those looking to buy in the near future.

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