Central Banks Calls on Government for Raising Tax on Residential Property

On Monday, the Bank of Israel presented the new government of the country with a list of recommendations for dealing with the housing crisis, which also includes an increase in municipal taxes.

The central bank serves as the government’s economic adviser and in its role, it highlighted six actions that could be taken for giving economic growth a boost.

The program had been presented to Bezalel Smotrich, the Finance Minister, and Benjamin Netanyahu, the Prime Minister, along with other government ministers.

The recommendations

One of the six recommendations included introducing policies in the housing market that would make it more affordable for people to purchase an apartment, or reduce the cost of rent.

This could be accomplished through encouraging housing construction, as once supply increases, prices would automatically go down. Offering new financial tools for support are also included in the policies.

The Bank of Israel also asked the government to increasing the property tax or municipal tax on housing, which is also called ‘arnona’.

It also said that tax on property that has been zoned for commerce and business should be reduced. The central bank said that the arnona tax does not offer an incentive for residential construction.

It said that the tax works as a negative incentive for local authorities, due to which they need increase it from every resident.

The existing situation

Municipalities currently have the incentive of approving construction on the land that has been zoned for industry and commerce, rather than that zoned for housing.

This is due to the fact that residential tax rates are lower than business tax rates.

If the government decides to implement the recommendation, municipalities will be able to earn more revenue through higher taxes on residential properties.

This might prove to be an effective move in the long run, but it would be extremely unpopular because it would only add to the problems of a public that is already facing a cost-of-living crisis.

One of the key proposals of the new government has been implementation of a freeze of one year on hiking municipal property tax rates. Nonetheless, the central bank still wants to reduce housing prices.

Home prices

There was a record 20.3% increase in home prices in Israel in 2022, while borrowing costs were increased to 3.75% by the Bank of Israel since it started hiking rates in April for battling inflation.

Despite all its efforts, the inflation in Israel is still above 5%, which means it is higher than the 1% to 3% target of the central bank.

Higher interest rates also created problems for potential and existing mortgage borrowers as most of the home loans in Israel are connected to variable rates.

Moreover, the amount of equity needed for buying a home is also rising and this widens the affordability gap, particularly among first-time buyers and young investors.

The Bank of Israel also said that a high supply of housing units should be maintained and there should be significant investment in infrastructure as well.