Flug Thrashes Lapid’s VAT Scheme


Bank of Israel chief Karnit Flug presented her itemized list of objections to Finance Minister Yair Lapid’s plan to exempt some first-time homebuyers from the 18 percent Value Added Tax (VAT).

Eliminating the VAT, she asserted, a day after the Housing Cabinet unanimously approved the Lapid plan, will further inflate the already soaring demand for apartments, which, given the short-term limits on supply, will drive up prices.

The plan will burden the government with the responsibility for complex supervision and oversight, and likely lead to distortions in the market.

The NIS 1.6M recommended ceiling on prices will not deter affluent buyers from taking advantage of the exemption, while nothing in the program benefits poorer people, who will be the ones to suffer from the eventual rise in new home prices.

Such tax breaks are vote-getters that politicians will be reluctant to overturn once they are in place, she noted. On the contrary, they often expand them over time. As it is, the NIS 2 billion annual price tag is unfunded and will likely grow in the future.

Flug limited her critique to the economics of the proposal. She did not address the legal difficulties the VAT cut will face, from petitioners who charge that the plan, which makes the exemption available only to those who served in the military, is discriminatory and unconstitutional.

In contrast, she gave her qualified support to Construction and Housing Minister Uri Ariel’s plan, backed by Prime Minister Binyamin Netanyahu, to introduce target pricing on new land. She said that in theory it could reduce prices but will require flexibility and sound implementation.

Under the target-price plan, the finance minster will lead a team that includes the housing minister, Israel Lands Authority director, Prime Minister’s Office director and a representative from the Attorney-General’s Office to set a maximum price for apartments built on newly-released ILA land. That price must be 20% below market prices at the end of 2013. It will not apply to areas released by the IDF or to communities where the potential for at least 500 housing units does not exist.

Flug was only the most senior in a long line of both expert and political opponents to the Lapid plan.

“This is the most populist decision that has ever come out of the Finance Ministry,” charged Eldad Tamir, CEO of the Tamir Fishman investment house. “This decision will lead to an increase in housing prices, in stark contrast to the fact that housing prices must come down. This is not an economic or professional decision, [but a decision] whose whole purpose is to be seen favorably in a specific sector, at the expense of the general public.”

“The steps the housing cabinet announced indicate, more than anything, a loss of control,” Rafi Gozlan, chief economist at the IBI investment house, said. The way to bringing down prices, he said, is to increase supply and creating disincentives for real estate investors.

Meretz party chairwoman Zehava Gal-On put her characteristic ideological spin on the issue: “The Central Bureau of Statistics recently published data showing an increase of over 120% in housing starts in Yehudah and Shomron,” she said.

“Just today it was revealed that just 2,765 apartments were put on the market since the start of 2014 — a rate four times slower than what is necessary to deal with the current supply — while 60% of the land marketed was beyond the Green Line.”

Gal-On denounced it as a quick fix which will not work to solve a crisis over a decade in the making.

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