Israel: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
16 Sep 2015
eISBN:
9781513594675
Language:
English
Keywords:
ISCR; CR; Israel; price; pay; productivity; gift tax; Israeli government; tax system; tax exemption; housing supply; Capital gains tax; Property tax; Value-added tax; investments Israel
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Israel: Selected Issues

Abstract

Israel: Selected Issues

The Residential Real Estate Tax System In Israel: A Comparison with Other Countries and with best Practices1

This paper compares the system of taxation on housing in Israel with other countries and with best practices. It also assesses the role the tax system could play in containing the housing price boom, and in making housing more affordable.

A. Introduction

1. Most economists agree that taxes on immovable property are among the most efficient and least distorting ways for government to raise money. Recent empirical studies also find that taxes on immovable property are among the least detrimental taxes to economic growth (Arnold, 2008; Heady and others, 2009).

2. Taxes on housing are one of the most important forms of immovable property taxes. Taxes on housing are often a key source of revenue for local governments. They are a particularly attractive source of revenue because they are much harder to avoid than taxes on financial assets, and they are less likely to lead to behavior changes. Ironically, because they are so transparent and hard to avoid, they are also very unpopular (Norregaard, 2013).

3. This paper discusses the system of taxation on housing in Israel in the context of the recent increases in housing prices. The structure of the paper is as follows. Section B discusses the various taxes on housing in the context of tax theory. Section C compares the system of taxation on housing in Israel with best practices. Section D compares revenue yields from housing taxation in Israel with its peers. Section E discusses tax policies and housing affordability/prices. Section F concludes.

B. Taxes on Housing: What does theory say?

4. Taxes on housing can be divided into “core” property taxes and other taxes.

  • Core property taxes include property transaction taxes, recurrent property taxes, recurrent tax on net wealth, and other non-recurrent taxes on property;2

  • Other taxes include value-added tax (VAT) and capital gains tax for housing.3

5. Assuming a government wants to raise revenue by taxing residential real estate, how should the corresponding tax system be designed so that it is most efficient and least distorting? To answer this question, it is important to realize that residential estate is both an investment asset and a durable consumption good. From this it follows that housing taxation should be designed so that it does not distort the neutrality between housing as an investment asset and other financial assets nor that between housing as a durable consumption and other consumer goods and services.

Housing Taxes that Treat Housing as a Consumption or Investment Good

6. Taxes on the consumption value of housing. As discussed above, residential property can be considered as a durable consumption good.

  • Economic logic suggests that VAT should be levied on real estate. VAT is a tax levied on the consumption of goods and services, and real estate is a durable good par excellence. It likely yields services over more than one period, and it is commonly resold. Thus the issues that arise in its VAT treatment are simply those that apply to all such goods, but writ large (Ebrill and others, 2001). For the case of owner-occupied properties, VAT could be levied annually on the consumption value of the housing service (i.e., imputed rents). However, imputed rents are rarely taxed not only because of the challenges in properly and fairly estimating imputed rents but also the political unpopularity in taxing housing services for owner-occupied housing.4

  • Alternatively, VAT can be levied at the time of purchasing a new house, assuming a house is priced at the present discounted value of the stream of housing services that the house will generate in the future.

  • The majority of European Union (EU) member states apply either a standard VAT rate or positive VAT rate to the supplies of new buildings (Figure). Seven EU states exempt VAT on the supply of new buildings while the United Kingdom offers a zero VAT rate for the sale of new properties.5 The European Commission is generally fond of applying simple and uniform VAT rates because it minimizes otherwise substantial compliance costs and smoothes the functioning of the internal market. However, the EU VAT law allows member states to maintain reduced rates and exemptions that were already in force before 1991, provided they were maintained for “clearly defined social reasons and for the benefit of the final consumer.”6

A05ufig1

EU: VAT Rates for Supplies of New Buildings, as of January 1, 2015

(Total number of countries=28)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Source: EU (2015)1/ Include Austria, which exempts VAT if a new house is acquired for letting and leasing (otherwise applies the standard rate;) and the U.K., which applies a zero rate for social housing (otherwise applies the standard rate).

7. Taxing housing on capital income. Residential property can be regarded as an investment asset, which should be taxed just as other investment assets.

  • To ensure consistency between residential property and other financial assets, the theory is in favor of taxing imputed returns while fully deducting mortgage interest, maintenance costs, and depreciation.7 In addition, capital gains from selling a house should also be taxed. In practice, however, imputed returns are seldom taxed for the reasons discussed above.

  • Alternatively, a government can levy recurrent property tax—not as a charge for local service discussed below—to approximate the return from the house while not allowing for mortgage interest deductibility (EC, 2012). For the alternative case, too, capital gains tax should be levied when a house is sold.

8. This suggests that two broad options exist that are in line with best practice

  • Option I

    Consumption: Levy VAT on the consumption value of housing (i.e., imputed rents) Investment: Tax imputed net return; Deduct mortgage interest; Tax capital gains

  • Option II

    Consumption: Levy VAT on new constructions

    Investment: Levy recurrent property tax (to proxy imputed net return, inclusive of mortgage interest cost); Do not deduct mortgage interest; Tax capital gains

Other Housing Taxes

9. Taxing housing as a charge for local services. Recurrent property tax as a charge for local services is widely used, and it is often considered efficient and good local taxes.8 If a recurrent property tax is levied on top of the taxes listed above, the tax neutrality would no longer hold, but it can be justified from the tax efficiency point of view. Some studies, meanwhile, argue that the value of a property normally reflects the quality of local services—for example, the average housing price in the area with high-quality public schools could be higher than the average housing price in other areas—therefore the charge for local services could be regarded as a capital (or consumption) tax.

10. Taxes on immovable property transfers are widely used but distortionary. They are distortionary because they tend to reduce turnover of properties (cause a friction) and hence result in resource misallocations (Johansson and others, 2008; Norregaard, 2013).9 They may also create an incentive for both buyers and sellers to agree on an artificially low invoice to reduce the tax burden.10

C. How does the Israeli system compare with best practices?

11. The current framework of housing taxation in Israel appears to be broadly in line with the best practices, but generous exemptions do not allow the framework to work as expected. This section compares the system of housing taxation in Israel with the best practices.

Table. Taxes on Housing, Best Practices and Practices in Israel

article image

Option 1 is the best practice according to the tax theory while Option 2 is operationally more feasible and could offer broadly similar results as Option 1. A country takes either option, but not both.

Housing Taxes that treat Housing as a Consumption or Investment Good

12. As taxation on housing services, a standard VAT is levied on new construction, which is in line with the best practice. During 2014, an idea of introducing a zero-VAT rate for the supply of new constructions for a targeted population came up. The idea has subsequently been discarded.

  • Positive sides of introducing zero VAT for new housing would include reducing post-tax prices of the eligible properties, which could serve as social policy through making housing more affordable. Boosted demand from the tax incentive could increase pre-tax prices, which benefits developers and may enhance housing supply.11

  • There are also significant side effects. Demand for the eligible houses likely increases, which could raise pre-tax housing prices given Israel’s low elasticity of housing supply to demand.12 This would adversely affect non-eligible buyers. In addition, the measure could trigger capital reallocations, from non-housing to housing markets. Moreover, higher income groups tend to have higher homeownership rates, suggesting higher income groups would enjoy the benefit from the zero VAT more than lower income groups.13 Finally, the revenue foregone from the introduction of the zero VAT is not negligible (estimated to be 0.2 percent of GDP or more). In general, social objectives embedded in the proposed VAT could be better attained by other policy measures. Effects similar to those of lower VAT can be achieved also through other policy instruments, for example targeted subsidy schemes or targeted changes in income tax (EC, 2007).14

13. As taxation on capital income, capital gains tax (“Mas Shevach”) is applied at 25 percent whenever there is a value difference between the original purchase price and current sale price (adjusted for CPI inflation). The capital gain tax exemption that allows an Israeli resident to sell a residential property once every four years was canceled on January 1, 2014. The only remaining exemption is for an individual who owns a single home that is his only property in Israel, and the selling price does not exceed NIS 4.5 million. The NIS 4.5 million threshold, however, is still quite generous, and about 70 percent of the total transactions in 2014 were below the threshold.15 Under the new rule, a foreigner can receive the capital gain tax exemptions only if it is proven that the foreign individual does not own a home in her country of residence.16 A seller may also have to pay a betterment levy (“Hetel Hashbacha”) to the local authority when the property value increased owning to a change of zoning. The levy is 50 percent of the added value to the property, but can be deducted from capital gains tax.

Other Housing Taxes

14. Recurrent tax on residential property is levied at the municipal levels (“Arnona”).

  • The tax is considered as a charge for local public services, and the rates have historically been raised in reference to CPI inflation and wage increases. The tax rates differ between municipalities, and also by the size and use of the property. Full or partial exemptions are given to new immigrants (only for the first year), senior citizens, and low-income families.

  • In general, Arnona is set to be higher for nonresidential properties than residential properties. For the case of Jerusalem, Arnona for a services and commercial office is three times higher than Arnona for a luxurious apartment (Table).17 There is a view that the current Arnona for residential properties are not high enough to cover the cost of public services (e.g., utilities, schools), creating disincentives for supplying residential properties.

  • Arnona is levied on the size of a property, not on the value of a property, constituting an ostensible departure from the best practices. A main logic behind this regime is to avoid the cost of maintaining and updating a cadastre. However, using the size and type of a property and the zoning roughly proxies property prices.

Arnona for Jerusalem by Selected Property Usages, 2015

(In shekel per square meter)

article image

15. An acquisition tax (“Mas Rechisha”) is levied on a purchaser of property. The tax rate is progressive with respect to the value of the property. In light of the increasing housing prices, the tax rates have also been raised in multiple steps. For investors—defined as individuals who own more than one house—the lowest tax rate was raised from 3.5 percent to 5 percent, and then further to 6 percent in February 2011, while a 7 percent tax bracket was added in 2011 followed by further addition of 8 and 10 percent brackets in August 2013. For individuals who own only one house, the highest tax rate was 5 percent until 2012, but 8 and 10 percent tax brackets were added in January 2013. Foreigners—whose presence is rather small, around 3–5 percent of total transactions—used to be exempted from the acquisition tax, but the exemptions were abolished also in 2014. There remain, however, certain exemptions for social-policy considerations. The current top rate at 10 percent is on a high end compared to other countries (Table), although most—about 99 percent of total—transactions are within the tax brackets of 5 percent or below for buyers with only one house.

Transfer Tax Rates in Selected Countries, 2010

article image
Source: UN (2011)
A05ufig2

Israel: Composition of Buyers with One Apartment by Acquisition Tax Brackets

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Sources: Israeli authorities; and IMF staff calculations.1/ Data up to October 2014.
A05ufig3

Israel: Composition of Buyers with More than One Apartment by Acquisition Tax Brackets

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Sources: Israeli authorities; and IMF staff calculations1/ Data up to October 2014.

16. Generous exemptions for gift tax and inexistence of inheritance tax appear to be supporting cash-based housing transactions. The gift tax is exempted for any gift (i.e., an asset, including land, property, or rights) transferred by an individual to one of his family members as long as the donee is an Israeli resident.18 Since the beginning of 2014, however, the government has tightened the eligibility of gift tax exemption, by excluding transfer between siblings from the exemption. The inheritance of assets and rights, as well as other than real estate is generally not taxed.

D. Revenue collection from Housing Taxes—A cross-country comparison

17. The collection from the “core” property taxes is about 2½ȓ3 percent of GDP in Israel, which is above the OECD median (Figure). The composition of the “core” property taxes is characterized by a large share of recurrent taxes levied by municipal governments, followed by transaction taxes and other non-recurrent property taxes (e.g., betterment levy). The collection of the recurrent property tax has been stable, possibly suggesting tax base—property values—does not reflect the market values.

18. If we include other taxes (VAT for new residential constructions and capital gain tax) total revenues amounts to around 4 percent of GDP. Despite the large increase in housing prices since 2007, however, the collection of housing taxes has remained broadly unchanged.

A05ufig4

OECD: Property Tax Collection, 2013 or the latest

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Source: OECD.
A05ufig5

Israel: Taxes on Housing

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Sources: Israeli authorities, OECD, Haver, and IMF staff estimate.

E. Tax policies and housing affordability/prices

19. Since 2008, housing prices in Israel have risen sharply. During the period, demand for houses was boosted by lower interest rates while housing supply could not catch up due to various constraints. This section will assess a) to what extent the tax system may have contributed to the price increases; and b) to what extent the tax system can (or should) help make housing more affordable.

What are the factors behind the increase in housing prices?

A05ufig6

OECD: Change in Real House Prices

(Percentage change)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Source: OECD

20. Real house prices in Israel increased by 56¼ percent from 2008 Q4 to 2015 Q1.19 During the same period, many countries that did not experience a housing price boom during the pre-crisis era also saw an increase in housing prices (e.g., Austria, Germany, Switzerland), but the degree of price increases observed in Israel somewhat stands out (Figure).

21. Both demand- and supply-side issues have driven the price development in Israel.

22. Demand-side issues. Homeownership can be explained by demography and macroeconomic conditions, such as households’ disposable income and interest rates (e.g., Andrews, Caldera-Sánchez, and Johansson, 2011).

  • Demography. Israel’s housing demand—and also supply—used to be largely driven by the waves of immigrations (Figure).20 The increased housing supply in the mid-1990s eased demand pressures, as evident by the reduced population-to-dwelling and household-to-dwelling ratios. However, the demand pressures from demography—both from population and the number of households—appear to be mounting again during the 2000s.

  • Low interest rates. More recently, starting in 2008-09, favorable financing conditions appear to have boosted demand for houses.21 During the last 10 years, the correlation between housing transactions and mortgage rates was high (-0.7 for 5-year mortgage rate and -0.8 for 20 plus-year mortgage rate). In addition, several policies, including taxation, has been creating a bias toward homeownership, (or in some cases deliberately promoting homeownership).

A05ufig7

Israel: Housing Starts and Population

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Source: Haver Analytics.
A05ufig8

Israel: Real Housing Demand Pressures

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Sources: Bank of Israel, Central Bureau of Statistics, Haver Analytics.1/ Data break in 1998, 2001, and 2009.

Israel: Housing Market Transaction and Mortgage Rates, 2009–14

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Sources: Israeli Tax Authority and Haver Analytics.

  • Tax system creates bias towards homeownership. While the absence of a mortgage interest deduction has helped mitigate a debt bias, generous exemptions on the capital gain tax and acquisition tax likely have promoted homeownership and housing investments Israel.

  • Under-regulation of rental market makes renting unattractive. The rate of homeownership in Israel was 70 percent in 2009, slightly above the OECD median (Figure). Benchetrit (2014) indicates that the Israel’s pro-homeownership policy, including housing subsidies and public housing program, enabled widespread homeownership.22 The under-regulation of rental market may have been adding to a bias toward homeownership (Figure). While allowing for flexible rents is welcome, neither landlords nor tenants are protected by the type of specialized legislation on the rental of dwellings that can be found in other OECD countries—for example, a tenant’s rights and a landlord’s obligations are not properly regulated, and a long-term leasing contract virtually does not exist (OECD, 2011). The government has initiated a process of introducing a new law for fair rental to limit annual rent increase and short-term contracts.

A05ufig10

OECD: Tenure Structure Across Countries, 2009

(In percent of dwelling stock)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Source: OECD (2011)
A05ufig11

OECD: Tenant-Landlord Regulations in Private Rental Market, 2009 1/

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Source: OECD (2011)1/ The indicator measures the extent of tenant-landlord regulation within a tenancy. The indicater is scaled 0-6, where larger numgers indicate higher protection for tenants.

23. Supply-side issues. The elasticity of housing supply to price changes is among the lowest in OECD countries (Caldera-Sanchez and Johansson, 2011).

  • This is partly attributable to Israel’s high population density.

  • However, governance issues, including lengthy approval and permit processes, are also causing the bottleneck in housing supply. In Israel, the central government plays an important role in property development, stemming largely from the fact that the majority of the land is state owned. The lengthy processes are mainly due to (i) excessive regulations: every building plan (even a small renovation) constitutes a law, therefore any changes require a cumbersome lengthy process; and (ii) excessive centralization: the process is overly centralized, which is causing substantive inefficiency. Regarding the privatization of lands, the Israel Land Authority (ILA) approves the release of land for development, and therefore has a potentially profound influence on where and when new housing is built. In the past, development permits issued by the ILA appear to have given more priority to regional policies than market developments. For instance, according to Bank of Israel (2011) new permits in 2009 and 2010 were concentrated in the Jerusalem region and the south, with rather less focus on the north, and notably the center, where prices have been rising fastest.23

A05ufig12

OECD: Price Responsiveness of Housing Supply

(Long-run price elasticity of new housing supply)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

Source: OECD Economic Outlook, Volume 2010 Issue 2.
A05ufig13

Israel: Duration of Construction Process

(In years)

Citation: IMF Staff Country Reports 2015, 262; 10.5089/9781513594675.002.A005

1/ Permit from the local committee.2/ Tender publication and decision regarding the winner.Source: Taub Center, State of the Nation Report 2014.

Can fiscal policy contribute to mitigating further housing price increases?

24. Counteracting real estate booms may help prevent boom-bust cycles that can have dire macroeconomic and fiscal consequences. There are many examples of housing prices booms that have ended badly, particularly if they were accompanied by a credit boom.24 Fortunately, in Israel the housing price boom has not been accompanied by a credit boom. However, a housing price correction could still have a large impact on the economy through the wealth effect.25

25. International experience suggests that tax treatment of housing is typically not the main driver of housing price boom (“the problem”)—but it does contribute. Real estate price bubbles can be driven by various demand factors, including steady income growth, population growth, an extended period of accommodative monetary policy, and innovation in financial products (e.g., subprime lending for the case of the United States). In many cases, special tax treatment for housing also increased household leverage and housing prices, although taxation does not appear to have been the main driver of house price developments (IMF, 2009).

26. However, governments frequently consider taxes on housing as potentially effective instruments (“the solution”) in countering speculative housing price booms and housing price volatility.26 So what can governments do?

  • Removing distortions in the tax system. Any existing taxation setting that is causing a bias toward homeownership should be revisited.

  • Introducing temporary new distortions to break a bubble that is feeding on itself. In theory, if a government can clearly identify a bubble situation in a timely manner, one could argue for a temporary, but distortionary, demand-side measures (i.e., transaction taxes). In practice, however, identifying a bubble situation in a real time is difficult, and therefore distortionary measures are not widely used to counter act housing prices.

27. As discussed in Section C, the Israeli government implemented a number of tax measures in over the last few years in view of counter-acting the recent housing price boom.27

Regarding the acquisition tax, the government raised tax rates for the lower two brackets for investors and added high brackets for both investors and non-investors. The criteria for exemptions have been also tightened for the acquisition tax, capital gain tax, and gift tax, although the thresholds for the exemptions remain very generous.

28. What else could Israel do on the tax front?

  • Removing distortions. The current capital gain tax exemption—about 70 percent of total transactions are exempted—appear to be too generous for individuals with a single house and are creating a homeownership bias. The threshold for the exemption could be lowered. Forming a regime of capital gain tax on housing, however, requires careful design to limit the impact on labor mobility. So-called “lock-in” effects can arise if, following a house price increase, the associated capital gain is taxed more lightly if the owner remains in the house compared to moving (OECD, 2007). This suggests that taxing capital gains when realized (i.e., when sold) could create lock-in effects, but taxing on an accrual basis (i.e., when capital gains are generated, based on assessed values28) creates less of the effects. In addition, raising the recurrent property tax rates to the level comparable to the effective tax rates on income from other financial assets.

  • Introducing temporary new distortions to break a bubble that is feeding on itself. Key question here is whether there is a bubble. IMF (2013) suggests that housing prices were 25 percent above the long-term equilibrium, and the latest update suggests the misalignment has further increased to 30 percent. Dovman and others (2012), in the meantime, estimate the actual price was between 3 to 10 percent above the fundamental price. It is indeed difficult to assess in a real time whether the housing market is in a bubble situation or not. Typically, housing bubbles start with an increase in real demands, in the face of limited supply. Speculators then enter the market, believing that profits can be made through short-term buying and selling, resulting in deviations of housing prices from real demands. In theory, using a distortionary measure may not be completely precluded in the face of a housing bubble. However, in practice, given Israel’s already high acquisition tax rates, a further increase in the acquisition tax rates would not be ideal.

29. More important may be supply-side measures. Various fiscal and regulatory measures could help to promote housing supply.

  • Speeding up the privatization of land. Doing so could create a win-win situation if it enhances housing supply while increasing government revenue. There are divided views in promoting land privatization in the Israeli context. Pro-privatization views, on one hand, include that monopolies are inherently inefficient compared with competitive markets and public administration and decision-making are inevitably less effective than private profit making organizations. Pro-public land ownership, on the other hand, argues that public ownership would promote the production of public goods (e.g., roads, national parks), preservation of land for large-scale developments, improved control for urban developments, and preventing the takeover of real estate by foreigners.29 Well-strategized land privatization could address market failure and help mitigate price pressures in the housing market. In this connection, the Israeli government announced in 2011 two welcome plans for affordable housing: first, exempting a minimum tender offer for property developments that include a certain share of the apartments (20-40%) to be rented out on a long-term basis; and second, providing low-cost housing for homebuyers through using the existing reverse-auction process. It is, however, important for the government to follow up on the use of privatized lands so that privatized lands are used as intended.30 To address the land issues, a committee to identify land for development and expedite the planning process has been established. In addition, power to approve building plans has been decentralized to local committees.

  • Addressing the governance issues to allow for more timely approval and permission of housing development. In this context, the government has recently put several authorities involved in the process, such as the Israel Land Authority and the Planning Committee, under the command of the Ministry of Finance to improve coordination and shorten the planning process.

  • Adjusting Arnona for residential properties to reduce the disincentive for local governments to supply residential properties.

  • Enhancing infrastructure—for example, roads, public transportation—to expand the commutable areas.

F. Conclusion

30. The current framework of housing taxation in Israel is broadly in line with global standards, but with few elements that have likely increased underlying demand for housing.

The absence of mortgage interest deduction is welcome. However, various tax exemptions, including capital gains and acquisition taxes especially for individuals with a single house, seem to have contributed to the underlying demand pressures during the recent hikes in housing prices. In addition, the absence of an inheritance tax and generous gift tax system for the Israeli appears to have contributed to cash-based housing transactions.

31. The Israeli government has appropriately taken steps to tighten the eligibility of exemptions for the capital gains, acquisition tax, and gift taxes. The government also raised the effective property acquisition tax rate. While there is a scope for further tightening exemptions for capital gain tax for individuals with a single house through lowering the eligibility threshold and increasing recurrent property tax rates, a further aggressive use of taxation to counter act the housing boom would not be productive.

32. Addressing the supply-side issues will be critical. Speeding up the privatization of land could create a win-win situation if it enhances housing supply while increasing government revenue. Arnona for residential properties could be adjusted to give municipalities incentive to supply residential properties. In addition, the governance issues constraining timely approval and permission of housing development need be addressed. Enhancing the investment in public transportation and roads could also expand the commutable areas (and the supply of developable land). In this context, the government’s recent initiatives to shorten the planning process and boost housing supply are welcome.

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1

Prepared by Aiko Mineshima.

2

A transation tax is a tax (fee) imposed on the transfer of title to property from one entity to another. Examples for such taxes include some forms of stamp duty, real estate transfer tax, and levies for the forma registration of a transfer. Recurrent property taxes consist of taxes payable regularly, usually each year, in respect of the use or ownership of land, buildings, or other structures utilized by enterprises in production, whether the enterprises own or rent such assets. A recurrent tax on net wealth is a levy on the net value of personal assets. Assets include owner-occupied housing, cash, bank deposits, money funds, and savings in insurance and pension plans, investment in real estates and unincorporated businesses, and corporate stock, financial securities, and personal trusts. Other non-recurrent taxes on property include estate, inheritance, gift taxes, and others.

3

VAT is a tax levied on all sales of commodities at every stage of production. Its defining feature is that it credits taxes paid by enterprises on their material inputs against the taxes they must levy on their own sales. A capital gains tax is a tax on the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale.

4

For example, among the EU member states, only few countries (e.g., Luxemburg, Netherlands) tax imputed rents for main dwellings. In the case of the United Kingdom, the Mirrlees review proposed a Housing Service Tax to approximate a VAT on housing services. It reflects the fact that the United Kingdom applies a zero VAT rate on construction and sale of residential property, and difficulties of covering both new and old houses.

5

The final value that a purchaser faces would be lower if, everything else is same, a country imposes a zero VAT rate to the supply of houses than exempting VAT from new houses. It is because builders would factor in the lack of input credits into the final value for the case of VAT exemption. Among the countries that exempt the sale for new buildings, Germany and Portugal apply instead the property transfer tax (registration duty). The rate of the transfer tax is lower than the standard VAT rate. However, no inputs credit is available.

6

Article 110, “COUNCIL DIRECTIVE on the common system of value added tax” (2006/112/EC, November 28, 2006).

7

A number of studies (e.g., IMF, 2009; Crowe and others, 2011; Hendershott and others, 2003), however, raise the issue of a bias toward debt-financed homeownership through providing mortgage interest relief. In light of such concern, several countries have taken steps to reduce these distortions. For example, Ireland and Spain have eliminated mortgage interest deductibility on new loans, and it is being gradually reduced in Denmark and the Netherlands (IMF, 2014).

8

The base for recurrent property tax varies from country to country, which can include land only, land and immovable improvements, just the improvements, or different combinations of land and improvements for different types of land use (UN, 2011). One element worthwhile mentioned would be the use of a pure site (land) tax. If better or more productive use of land is the driving motive, a pure land tax on land value would offer the best tax design since—being independent from actual land use—this would maximize the incentive to apply the land to its optimal use (OECD, 2008; Norregaard, 2013). For the case of Israel, where over 90 percent of land is state owned, the use of a land tax would not be effective in the short run. However, a good use of a land tax could be explored as the privatization of land proceeds in the future.

9

For this reason, some countries replacing transfer taxes—totally or partially—with recurrent immovable property taxes (e.g., Ireland, Portugal).

10

For the case of capital gains taxes, buyers do not have an incentive to agree on a low invoice as their capital gain tax burden would go up when selling.

11

Given the low elasticity of housing supply to price changes, it is unclear if the increased profits for developers stimulate housing supply.

12

The total impact on the overall housing prices is difficult to project because the prices of houses below NIS1.6 million percent would go up closer to the upper limit, while houses that would have been priced slightly above NIS1.6 million may be adjusted downward below the threshold to become eligible for the tax benefit.

13

Sarel (2014) estimates that 21 percent of the benefits would go to the top 10 percent income group. In addition, increases in pre-tax housing prices may benefit developers rather than the targeted population.

14

The EC study argues for applying a reduced VAT rate to certain cases, for example the sectors whose services are easily substituted for do-it-yourself or underground work. In addition, in theory, reducing VAT rates for the sectors employing many low-skilled workers would boost demand for low-skilled workers. However, the EC study finds that the overall impact on demand for low-skilled works is unimpressive because differences in low-skilled employment between industries are limited: indeed making standard VAT rate apply for all sectors currently benefiting from reduced rates is likely to create a similar sized demand boost for low-skilled workers.

15

Well above 90 percent of the transactions if limiting the sample to buyers with a single home.

16

The new regime is introduced in two stages: a transition period from January 1, 2014 to December 31, 2017 followed by the permanent regime from January 1, 2018. During the transition period, a reduced tax rate calculated based on the number of days passed since January 1, 2014 will be applied to an ineligible foreigner.

17

This could be partly explained by the fact that per-square meter/foot price tends to be higher for a commercial property than a residential property—meaning the gap could be smaller when comparing the effective tax rate per property value.

18

Any gift to a non-Israeli resident is taxable.

19

On a nominal term, housing prices almost doubled in between 2007 Q1 (the recent bottom) to 2015 Q1.

20

Israel has a history of promoting homeownership. Benchetrit (2011) indicates that from the establishment of the stat through the early 2000s, the Israeli government gook various steps to encourage homeownership, based on the social, economic, and maintenance-related considerations. Socially, it was believed that homeownership fostered a sense of rootedness and personal connection to one’s geographical locale, and objective of particular importance in so-called “development areas.” Economically, homeownership was believed to encourage savings and lessens government investment, and also contributes to higher home maintenance standards.

21

Mortgage rates have been on a downward trend since the early 2000s.

22

Benchetrit (2014), however, argues that the homeownership rates have recently been declining because only a fraction of public housing program remains after a large portion of the public housing was sold.

23

This may be due to the advice made by the Ministry of Construction and Housing in late 2006 to restrict housing construction in the center of the country in light of the persistent decline in housing prices started in the late 1990s, possibly owing to the excess supply of dwellings after the surge in immigrations in the early 1990s. The government accepted this recommendation on August 24, 2008 (Government resolution No. 3973). This resolution was overturn on July 15, 2010 (Government resolution No. 1980).

24

In Ireland the unwinding of a credit and housing boom (housing prices declined by 50 percent) triggered a banking crisis and also resulted in a large decline in revenue from the housing sector (by about 3 percentage points of GDP from 2006 to 2011).

25

Recent studies (e.g., Kahn and Ribon, 2014) indicate a positive correlation between housing prices and private consumption in Israel. This may suggest a sharp correction in housing markets could have a second-round effect on the economy through lowering consumption.

26

Norregaard (2013) indicates that property taxes have been considered as potentially effective in countering speculative housing price booms and house price volatility. Examples include using property taxation in this respect include China and Singapore although the impact of taxes for this purpose is far from clear. Crowe and others (2011) conclude that the relationship between the level of transaction taxes and housing prices is ambiguous. However, transaction taxes that change with real estate conditions may be, in theory, more promising. On the boom side, China and Hong Kong SAR introduced higher stamp duties to dampen real estate prices and discourage speculation. Their experience, however, indicates that transaction volume responds more than prices do (suggesting that the associated collateral costs are high) and the impact of the introduction of the tax may be transit.

27

Since the beginning of 2014, housing transactions have been declining. While some may be attributable to the tightening of tax exemptions, but strong rebound in the late 2014 would suggest it was largely due to the “waiting” behavior caused by an anticipation of the introduction of a zero VAT on new apartments starting in 2015. The idea of the zero VAT was eliminated after the dismissal of the government in December 2014.

28

Capital losses would entail a tax refund.

29

The discussion largely draws on Werczberger and Borukhov (1999).

30

Housing Committee indicated during the IMF visit in December 2014 that in number of cases developers do not build as agreed in the contract, or do not even build anything, but the government does not follow up on the situation properly.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Israel: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2015: Issue 262
Publisher:
International Monetary Fund
ISBN:
9781513594675
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781513594675.002
  • View in gallery

    EU: VAT Rates for Supplies of New Buildings, as of January 1, 2015

    (Total number of countries=28)

  • View in gallery

    Israel: Composition of Buyers with One Apartment by Acquisition Tax Brackets

  • View in gallery

    Israel: Composition of Buyers with More than One Apartment by Acquisition Tax Brackets

  • View in gallery

    OECD: Property Tax Collection, 2013 or the latest

    (In percent of GDP)

  • View in gallery

    Israel: Taxes on Housing

    (In percent of GDP)

  • View in gallery

    OECD: Change in Real House Prices

    (Percentage change)

  • View in gallery

    Israel: Housing Starts and Population

  • View in gallery

    Israel: Real Housing Demand Pressures

  • View in gallery

    Israel: Housing Market Transaction and Mortgage Rates, 2009–14

  • View in gallery

    OECD: Tenure Structure Across Countries, 2009

    (In percent of dwelling stock)

  • View in gallery

    OECD: Tenant-Landlord Regulations in Private Rental Market, 2009 1/

  • View in gallery

    OECD: Price Responsiveness of Housing Supply

    (Long-run price elasticity of new housing supply)

  • View in gallery

    Israel: Duration of Construction Process

    (In years)

EU: VAT Rates for Supplies of New Buildings, as of January 1, 2015

(Total number of countries=28)

Israel: Composition of Buyers with One Apartment by Acquisition Tax Brackets

Israel: Composition of Buyers with More than One Apartment by Acquisition Tax Brackets

OECD: Property Tax Collection, 2013 or the latest

(In percent of GDP)

Israel: Taxes on Housing

(In percent of GDP)

OECD: Change in Real House Prices

(Percentage change)

Israel: Housing Starts and Population

Israel: Real Housing Demand Pressures

Israel: Housing Market Transaction and Mortgage Rates, 2009–14

OECD: Tenure Structure Across Countries, 2009

(In percent of dwelling stock)

OECD: Tenant-Landlord Regulations in Private Rental Market, 2009 1/

OECD: Price Responsiveness of Housing Supply

(Long-run price elasticity of new housing supply)

Israel: Duration of Construction Process

(In years)