IMF Warns Against Home Price Inflation

In its latest report to the Bank of Israel, the IMF recommended: “If house prices continue to rise, macroprudential measures, notably those which directly restrict the size and risk of mortgages, should be further tightened. Consideration should also be given to increasing temporarily the property purchase tax for non-primary residences. Most importantly, however, concerted efforts should be made toward alleviating supply-side constraints, including by implementing the recommendations of the Housing Committee,” the report states.

The IMF also advocated higher interest rates growth accelerates or if the shekel weakens “including because of policy tightening in major advanced economies.” The report also stresses that “the BoI should be prepared to respond nimbly to changes in the economic environment.”

According to the IMF assessment, growth in Israel will be 3.55% this year, dipping to 3.25% in 2014.

The report runs counter to Minister of Finance Yair Lapid’s promise that from 2015 “things will get better” and lower taxes can be anticipated. The IMF said, on the contrary, that in 2015 it will be necessary to raise taxes and to make further budget cuts control the fiscal deficit.

“For 2015 and beyond, additional fiscal adjustment will be necessary to put public debt firmly on a downward trend. This should include a reduction in expenditure growth, as spending levels implied by the current expenditure rule are very high. However, given the low levels of non-interest civilian expenditures in Israel, relying solely on reducing expenditure growth (by modifying the expenditure rule) will compromise long-term growth and sustainability. Therefore, additional revenue measures will be needed.

This article appeared in print on page 7 of the December 17th, 2013 edition of Hamodia.