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CEO: Lapid's 'Cost-Cutting' Plan Likely to Drive Up Home Prices

When government promises a 'discount,' it's time to watch your wallet, warns the CEO of a large Israeli construction company
By Yaakov Levi
First Publish: 3/20/2014, 11:57 AM

Construction site
Construction site
Flash 90

In an interview Thursday, Finance Minister Yair Lapid said that the state was “prepared to lose billions of shekels” in tax revenues in order to make housing cheaper. Speaking on Israel Radio, Lapid said that his plan to excuse first-time home-buyers from value-added tax (VAT) payments was “not meant to satisfy the needs of economists or interest groups, but of the middle class and young couples.”

According to the proposal by Finance Minister Yair Lapid, value-added tax (VAT) would be eliminated for first-time apartment buyers. According to Lapid's plan, families who get the discount would have to hold onto the apartment for at least five years. This measure is intended to prevent couples from buying apartments for the purpose of trading in them. VAT is currently 18%.

Lapid's plan would provide the discount to Israelis who had at least one family member who served in the IDF – excluding most hareidi and Arab families, both groups that generally do not serve. It is not clear if Lapid's condition would stand up to examination by the High Court. In the past, National Insurance child allowance payments were given only to families who had a member serving in the IDF, or who had received exemptions from service. Arab and leftist groups sued, and after several decisions by the High Court in the mid-1990s, the government eliminated the requirement.

Meanwhile, the head of a large Israeli construction firm said that since the plan was announced earlier this week, home sales have dropped like a rock – to next to zero. In an interview in business daily Globes, Dror Nagel, CEO of the Azorim construction firm, said that it was already clear that contractors would be damaged by the plan, which could take months to implement – and the longer it takes, the more damage they will sustain.

Without question people will hold out on new purchases or even cancel purchases they have committed to,” he said. “It's already beginning to happen. Why wouldn't they cancel if they know they can buy later with an 18% discount? It's the same when they announced the new prices for gas in Israel right before the end of the calendar month; if the price is to be reduced tomorrow at midnight, no one buys today, and if the price is set to rise, there is a long line for gas immediately as drivers seek to get one more 'discounted' tank.”

While Lapid's plan is a good idea, the details don't add up for all buyers – yet all prices will be affected by the process of legislation. “The plan will apply only to certain size apartments in certain areas,” said Nagel. “There are still a lot of details to be worked out, and this will take time. Obviously there will be a big demand for the 'discounted' apartments, which will naturally lead to great demand for them, driving up the price – so the 'discount' won't be as great as people think.”

In the meantime, he added, as potential buyers bide their time, competition for temporary – ie rental – housing is likely to climb, driving rents up even further. “Until this plan is actually implemented, there is going to be a lot of damage, both to builders and home-buyers,” he added.