Finance Minister Yuval Steinitz let us know last Tuesday that he has dropped his “500-gram hammer” and is now resorting to a “five-kilogram sledgehammer” with which to pound down spiraling real estate prices. But that’s not all. Steinitz went on to warn: “I am keeping the 10-kilo sledgehammer in reserve. If prices don’t fall by year’s end, we’ll consider using this bigger hammer.”If we were to nitpick, we might ask why – in view of the already escalating crisis – the lightweight hammer wasn’t ditched long ago. But this question pales into insignificance when we consider the nature of the five-kilo replacement now being employed, as well as against whom it is being wielded.var zflag_nid='794'; var zflag_cid='1091/988'; var zflag_sid='122'; var zflag_width='300'; var zflag_height='250'; var zflag_sz='9'; Even a cursory examination casts doubt on just how heavy the new hammer actually is. Its declared aim is to hit owners of real estate that was purchased for investment purposes. The logic is that by inducing them to sell, more housing units would be released onto the marketplace and that this would reduce the estimated 50,000-unit shortfall. But many owners of more than a single residence aren’t big-time speculators. Investing in a second apartment has for decades been a popular Israeli maand- pa favorite, especially in times like these when the interest paid on savings is low. Additionally, most such flats are subsequently rented out and hence do feature in the marketplace. Not only does the finance minister’s new tactic fail to distinguish between speculators and smaller-time investors, but his purportedly heavier hammer delivers no whack. It merely returns us to the previous, 2010 “betterment tax” arrangements. The betterment tax is levied on the difference in value between a given apartment’s purchase price and its eventual sale price. A temporary exemption from this tax is in place during 2011-2012 for owners of more than one housing unit. As of 2013, Steinitz announced, the betterment tax will be back. But that was the plan all along. His apparent threat is that anyone who doesn’t quickly sell extra properties before 2013 will be taxed when selling later. Steinitz evidently expects intimidated owners of more than one dwelling to rush and sell, thereby augmenting supply. Yet even Israel Tax Authority director-general Yehuda Nasradishi was unimpressed. “I foresee almost no effect, because I can’t imagine people selling their apartments so quickly,” he said. Moreover, even if Steinitz’s hammer does frighten apartment owners into selling, this would mean fewer flats would remain available for renters, which would appreciably raise all rents and would hit precisely those young couples who cannot afford to buy. Another Steinitz move seems to be a similar case of smoke and mirrors. He offers to exempt from the betterment tax anyone who sells an apartment that has been converted into an office – on condition it’s reconverted into a dwelling. Owners of such properties know that they get higher rents for apartments and pay lower local rates on them, that it’s easier and more profitable to sell a residence than an office and that only renting out residences exempts them from income tax. In other words, at play already are plenty of inducements not to use apartments as offices. Another inducement, and a negligible one at that, won’t tip the balance. Hence, this move too is insignificant. THE CONCERN is that what Steinitz has unveiled isn’t a program that will produce real change, but at most a minor tinkering that focuses on the margins of the housing market. Artificial manipulation of the market has never worked and won’t work now. Taxes won’t reduce the attractiveness of real estate when alternative investment avenues aren’t lucrative. Generating apprehension about a pre-existing tax that is about to be reimposed won’t radically improve supply. The only genuine antidote to the housing shortage is making more land available in areas of high demand, making the periphery more accessible via 21st-century high-speed rail transport and simply building more. The way to deflate the engorged housing bubble – a sore problem that chronically undermines our economic stability – is not via much-hyped but ultimately insubstantial new initiatives. Housing prices aren’t going to be terrified downward by imaginary hammers.
