Solution on the horizon for the housing crisis? On Sunday, Interior Minister Ayelet Shaked, Housing and Construction Minister Ze'ev Elkin, and Finance Minister Avigdor Lieberman presented a "major housing package" that includes a number of significant steps for solving the housing crisis and stopping the dizzying rise in prices in the Israeli real estate market.
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"Our goal is not to lower prices, but to stop the rise," announced Interior Minister Ayelet Shaked. "Let's not kid ourselves, there's no way to stop the insane rise in maritime shipping costs or prime zero, which is led by the US worldwide," added Finance Minister Lieberman.
The plan includes 17 dramatic sections, the implementation of which is in many cases complex, but which are sure to shake up the real estate market. These include: a total prohibition on renting Airbnb apartments in the center of the country; health clinics, law offices, and other professional services will not be allowed to operate from private apartments in high-demand areas (kindergartens and daycare will be excluded); and permits will be issued for splitting and adding 45 sq.m. to detached homes for building additional housing units while lowering improvement taxes.
The government's program for advancing the housing market sets as it goal the acceleration of the Israeli housing market while achieving the following objectives in the next four years: increasing housing starts by up to 280,000 new housing units; increasing the planning inventory by approving plans for 500,000 housing units in the planning system; sale transactions amounting to 180,000 housing units on state lands; and advertising 300,000 housing units for sale through a state land tender.
Raising the purchase tax for a second apartment
According to the new plan, the purchase tax for a second apartment will be raised from 5% to 8%. This step is expected to be implemented in ten days, with the bill memorandum submitted on Monday to the cabinet secretariat. According to Finance Minister Lieberman, there was much hesitation surrounding this issue, but a decision was finally made to restore the purchase tax to the level set by former Finance Minister Moshe Kahlon, in order to curb second-apartment purchases.
According to Housing Minister Elkin, following the reduction in the purchase tax for investors in 2020, investment purchases increased significantly, reaching about 20% of the total transactions in the housing market. The data shows that the rise in investors' demand leads to "surplus demand," which impacts the market at the expense of purchases by young couples, in light of the rise in apartment prices. Accordingly, in the past year, the reduction in the purchase tax accelerated the rise in prices.
"In order to curb the surplus demand of investors, which leads to price increases, we propose raising the purchase tax on investors according to the following gradations (at each gradation, the tax rate will apply from the first shekel): effective tax gradations – up to NIS 5,348,565 – 8% and over NIS 5,348,565 – 10%.
"This is a comprehensive program and not a patchwork solution. The message it sends is expected to have a maximal impact on the housing market. There was no way of avoiding raising the purchase tax, though personally, I was less enthusiastic about it," emphasized Finance Minister Lieberman.
The war on Airbnb
As part of the attempt to increase the supply of apartments for rent, especially in high-demand areas in the center of the country, the ministers announced there would be no less than 13,000 denials of permits to use apartments for Airbnb purposes.
Airbnb apartments are in effect apartments used for short-term rent, mostly for tourists arriving in Israel. These apartments are in the heart of high-demand areas, and they are eliminated from the inventory of apartments in these areas, which are characterized by a significant shortage of housing units.
It should be noted that the use of apartments for this purpose does not require licensing or registration, is not subjected to a different municipality tax regime than regular apartments, and is not limited by urban fabric planning considerations of the local authority. Although in theory, income tax or corporate tax must be paid on income from rent in this property-sharing framework, the rates of collection and enforcement are very low.
According to the government's housing plan, 13,000 apartments used for Airbnb purposes will be denied a permit. The plan proposes applying the prohibition on non-conforming use to apartments used regularly for hospitality purposes as well.
In addition, Minister Elkin expanded the prohibition on non-conforming use of residential apartments in the center of the country – meaning an end to clinics, medical centers, law offices, etc. However, it should be noted that clinics and businesses in the center of the country that operate from ground-floor apartments will be exempt. "It will take a few years, but anyone needing a permit extension will be denied," announced Elkin.
At the plan presentation, Finance Minister Lieberman announced that land marketing had achieved and even surpassed its goals, confessing he had given the director of the ILA a bottle of whiskey in appreciation of the results: "The whiskey is on me," said the minister, in response to 45,000 land deals.
"There are two elements we can't control," said Lieberman, "which are: prime zero, leading to historical, record-breaking numbers of mortgages from June till today; and transportation and construction costs, which have risen by hundreds of percentage points." The only way of stopping the wild market, he said, was increasing supply and cooling demand.
"Prices are rising globally, but Israel is still at the top of the list. Yanki Quint, head of the administration, did a great job in marketing lands. The whiskey is on me. There's been accelerated growth from the swearing-in of the government till today," said Lieberman.
"The state did not fulfill its obligations in the past," said Elkin. According to him, city mayors stopped marketing drives, leading to a decision to add NIS 3 billion to the budget for construction-supporting infrastructure. In addition, to meet the needs of the growing population in new neighborhoods, the government will invest in the years of the plan's implementation NIS 5.5 billion to build new schoolrooms. About NIS 640 million will be allocated over the coming years for providing incentive for licensing, and over NIS 2 billion will be invested in the Arab community to promote planning, development, building public facilities, and more.
Goal price: up to 20% discount on apartments for first-time owners
Beginning November 1, the goal price came into effect, aiming to provide an immediate solution for young buyers – a 20% discount (up to NIS 300,000) on apartment prices.
The price threshold was determined based on prices in 2020, to protect young buyers from this year's price surge. The state is forfeiting an income of NIS 12 billion from land sales, and forecasts say that figure may reach NIS 20 billion.
Regarding "evacuation and demolition" urban rejuvenation plans, a proposal that 51% consent was required for hazardous apartments was not approved due to opposition from the State Attorney General; in the current plan, the percentage of consent was changed to 66%. It will encourage pinui-binui projects in the Arab sector totaling NIS 55 million, and proposes investing around NIS 600 million in assisting local authorities with deficient infrastructure.
Since the TAMA38 program is set to expire in October 2022, and in light of its contribution to housing starts in recent years, the Interior Minister is promoting an alternative to the renewal of single buildings. As part of the outline program, local committees will be authorized to advance plans that will increase building rights to 400% in a demolition track and 200% in a reinforcement track, and to allocate floors for public uses that will provide solutions to the addition of housing units. Furthermore, a mechanism will be developed that will provide incentive to local authorities to promote such plans in their territory by levying improvement taxes or requiring that developers include a floor for public uses.
The program also includes long-term rent, with assistance to institutional bodies, aiming to achieve 6,500 long-term housing units next year.
As for public housing, the program unfortunately adds a mere 4,700 apartments, while the waiting list for available public housing numbers 30,000. For this purpose, the state will purchase 1,700 new apartments.
Minister Shaked noted there will be a way to extend TAMA38, but the preference is for the new alternative that provides a 400% addition in building rights.
Encouraging construction on private land
Another important issue addressed in the program is the encouragement of construction on private land, with a reduction of improvement tax on land from 47% to 25% in order to encourage the completion of construction on lots.
"In order to encourage construction on built private land, the government will advance measures that will assist those who initiate construction on private land in the coming years, and will exact a price from those who decide to continue holding the land without building," said Shaked. This includes tax exemptions for owners of built land that will be used for construction in the coming years.
Expedition of building processes will be achieved through self-licensing by architects, who will be authorized to issue building permits for buildings up to 9 stories high, subject to the consent of the local authority. The intention is to add floors to existing buildings and issue permits for office buildings.
In addition, the Ministry of Interior will lead a broad reform in licensing procedures and create a variety of fast tracks for receiving a permit quickly. In recent years, procedures for issuing building permits have grown longer, constituting a major obstacle in increasing housing unit supply. The proposed change will create a "licensing by authorized agent" procedure, in which architects will be authorized to issue building permits. The Arrangements Law created this possibility and it currently applies to some cases, with the Interior Ministry intending to broaden the arrangement to apply to more cases.
In addition, the Interior Ministry intends to advance other tracks suited to the needs of permit seekers, so that the public is offered a number of tracks. One possibility being considered is the creation of "licensing bodies" like those that exist in other developed countries. The exemption mechanism will be scaled down, so that issuing a building permit will become a strictly technical matter and will not include planning aspects that require consideration by the local committee.
Reacting to the press conference at the Finance Ministry, President of the Israel Builders Association Raul Srugo said: "Except for the decision to raise the purchase tax, the series of decisions taken by ministers Lieberman, Elkin, and Shaked is excellent, joining the reforms approved in the Arrangements Law that are aimed at lowering the price of the supply of apartments in Israel and leading to a solution to the housing crisis."
He added: "The decision to raise the purchase tax on a second apartment will not add a single apartment to the apartment supply and will achieve the exact opposite. The bottom line is that it is a tool for enriching the government at the expense of citizens. Before they sign the decision to raise the purchase tax, the ministers must look in the eye of the pensioner who wants to buy a second apartment after years of hard work in which he saved his pennies, Jews considering immigrating to Israel who will be discouraged by this tax, and, mostly, those who are unable to buy an apartment and will have to pay more rent next year. Whoever thinks that the added tax will stop the investment in apartments is seriously mistaken – it will cause a rise in apartment prices."
Promoting urban renewal in the periphery
Urban renewal in the periphery is also addressed in the government housing program, which proposes forming an inter-ministerial committee to test tools for improving and streamlining building processes. NIS 155 million will be allocated to new projects; a pilot program will be launched in the upcoming year, increasing the government budget in this area. The Israel Land Authority will test an "alternative land" pilot in five local authorities, in which the authority will be able to grant land rights for new construction in order to encourage urban renewal.
The absurd part of the program is that the authorities included – Ashkelon, Rehovot, Jerusalem, Givat Shmuel, and Lod – are not really in the periphery. These are cities with a planning inventory and enough new land to provide an alternative to expanding the pinui-binui program.
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In addition, as part of the Arrangements Law the government is advancing a huge reform to accelerate construction in urban renewal. The reform removes many obstacles to advancing pinui-binui projects, including, among other things, measures to diminish the phenomenon of objecting tenants, protect tenants from abusive signings and developers unable to advance construction in their complexes, create certainty and reduce regulation throughout the pinui-binui process, and deepen tax exemptions in these projects. The government will also invest a total of about NIS 500 million in supportive infrastructure for urban renewal projects to allow the addition of housing units to the built fabric.
Converting offices to residential apartments: in light of the significant surplus of supply of available lands intended for office use, and due to the need to expand the housing supply, particularly in high-demand areas, as part of the Arrangements Law the government is advancing the conversion of office space to residential space. This includes average-sized apartments, small apartments for long-term rent, student dormitories, and assisted housing, as part of a licensing procedure that will convert up to 30% of planned office space. The mechanism will enable quick conversion of office space for housing using a fast-track procedure and without a replanning process.
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