Gov’t obsession with real estate investors has pushed up rents

Many alarming figures have been published recently about Israel’s housing market, but one of the most alarming concerns the housing rental market. According to the Central Bureau of Statistics, the housing services index, which reflects the change in rental prices, records average monthly increases of over 0.5%. When you add to this figure the fact that the long-term rental industry is dying and that private investors are selling the apartments they own – the picture looks bleak. Beyond the alarming data, the most jarring thing about this market is that the government is procrastinating in dealing with the emerging problem.

Today, more than ever, the rental market needs to be examined from an overall macroeconomic perspective, since rent is also a major factor in the Consumer Price Index – comprising about a quarter of the index – and the housing services index has risen 6.7% over the past year, above the overall inflation rate of 5%.

In the first decade of the 2000s, the state did not get involved in the rental sector, while since the social protests in 2011 it has been working to restrict the involvement of investors in the market.

The measures taken by the government followed the rapid housing price increases at the end of the 2000s, when apartment prices rose by more than 50% within 3 years. The government then tried some quick steps to lower apartment prices.

Investors are leaving but housing prices are not falling

The theory formed in 2011 by the Ministry of Finance, under then finance minister Yuval Steinitz, was that apartment prices rose due to a lack of housing supply. It was claimed that investors were competing with young couples for apartments, and since they had more means, they were buying the apartments at higher prices.

In those days investors were genuinely dominant in the market, and they comprised over 25% of the entire market. So the theory sounded logical and had other advantages. It had a political benefit that shifted blame for the steep price increases from possible government failures to “greedy investors.” The solution was also relatively easy to implement, since it mainly required raising real estate taxes for investors.

The Ministry of Finance implemented a series of measures aimed at making the purchase of apartments not worthwhile for investors, by hiking purchase tax when buying the apartment and canceling the benefits of the betterment tax when selling it. At the same time, government figures used harsh language to condemn investors.

This was the case with Steinitz, as well as his successor Yair Lapid, who raised taxes again, feeling that Steinitz had not raised them enough. The proportion of investors in the market of investors fell, but apartment prices continued to rise.

Then came Kahlon but prices continued to rise

In 2015, Moshe Kahlon became minister of finance. He did exactly what Steinitz and Lapid had done, only more forcefully. He raised purchase tax for investors to 50%, which saw the investors’ role in the market shrink further.

But Kahlon did not make do with just that and repeatedly blamed investors for pushing up prices. He tried to enact a new legislation on higher taxes for owners with there or more properties, which was struck down by the Supreme Court.

However, investors understood where the wind was blowing. In an environment of high taxes, and potential new taxes and relentlessly under attack from politicians, they began selling properties. During Kahlon’s term as minister of finance between 2016 and 2020, investors sold thousands of apartments more than they bought.

Yet the government’s plan failed. Except for a very brief fall in prices between the end of 2017 and the end of 2018, housing prices continued to rise. Although taking investors out of the market succeeded to a great extent, the results in practice showed that the theory that investors were pushing prices up was wrong, and this has had dire consequence for the rental market.

Long-term rental is not currently relevant

Kahlon and his successors absolved themselves from the need to deal with the current rental market when they came up with the idea of encouraging companies and funds to enter the field of long-term rentals. This tries to solve today’s problems with tomorrow’s solutions, which will only start influencing the market when over 100,000 such apartments have been built. This day won’t come for at least another decade, so it is not relevant to the problems of the current rental market.

At the end of 2020, then Minister of Finance Israel Katz decided to cut purchase tax for investors. Investors returned to the market, and bought about 5,000 apartments, which were added to the pool of apartments leased out for rent. Apartment prices began to rise at the same time, probably regardless of this step.

Katz’s successor, Avigdor Liberman, came to office in a period of accelerated housing price rises, so the first thing he did was to raise purchase tax back to the levels of Kahlon’s days. The result – in 2022 over 6,100 apartments were withdrawn from the inventory of apartments for rent. The current Minister of Finance, Bezalel Smotrich, has not changed purchase tax, and during his short tenure in January and February of this year, over 600 additional apartments were taken out of the rental market.

The effect of all this on the price rises of apartments has been zero, and not by chance. The market for investment apartments in recent years is not similar to the one before the Kahlon period. If it was once possible to argue that investors hurt the supply of apartments for the rest of the market and especially for young couples, today this argument is disappearing, because investors sell more apartments than they buy, that is, they contribute to the supply of apartments. Not only that. The steep housing price increases of 2021-2022 happened after Liberman raised purchase tax, and investors had once again left the market.

The data show that government handling has been wrong

The data refute the entire way of thinking that guides the government’s handling of the investment apartment market, but even today it does not seem that anyone in the Ministry of Finance would dare to question or re-examine the correctness of this theory, and the price being paid by investors, those in the rental market, and the economy.

And the price is getting higher and higher. The demand for rental housing is increasing, since the price of apartments and the interest rate hikes have led to lower demand for buying apartments. And those who do not buy an apartment turn to the rental market. The acceleration of the urban renewal industry also contributes to a significant increase in demand for rent, from evicted tenants. However, the government still ignores this market, and devotes most of its time to dealing with apartment prices.

Published by Globes, Israel business news – en.globes.co.il – on May 1, 2023.

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