“Ghost” Apartments in Israel: A Plague?

Globes recently reported that there are 140,000 “ghost” apartments in Israel, which are either vacant or seldom used. Since Israel suffers from an inadequate supply of rental apartments, the phenomenon of seldom used apartments becomes a social and economic issue. Some of these apartments are purchased as second homes, and are not generally rented out, even on a part- time basis.

The Globes article comes on the heels of the Israeli government’s authorization of the housing portion of the Trachtenberg Report, which was approved on March 18th.  The report recommends a number of methods to increase rental housing and decrease the prices of Israeli apartments. One of these methods is to tackle the phenomenon of seldom used apartments by doubling the municipal tax rate on them. The government predicts that this step would release 15,000 additional apartments into the Israeli rental market.  I’m not so convinced.

The Municipalities of Jerusalem and Tel Aviv have already decided on imposing the double municipal tax, but have yet to implement it (on a practical level it may prove very difficult to implement). During the years that I lived in Jerusalem, I heard this subject come up on many occasions, as the legitimate concern is that Jerusalem needs the continuous and vital presence of residents, especially young families. Jerusalem has long had a reputation for a high number of seldom used apartments, but it is Tel Aviv that holds the record for the largest percentage of such apartments (25%), while Jerusalem comes in at 9%.

It is also important to realize that 50,400 (36%) of the “ghost” apartments are vacant for a variety of reasons, which have nothing to do with owning a second home. Some are still under construction by the building contractor or are undergoing renovations. Another group of apartments sits empty because the owner has passed away or has moved into nursing facility. Then there is a substantial number of apartments that aren’t habitable.

Add into this mix that the Central Bureau of Statistics doesn’t have figures for the numbers of seldom used apartments held by foreign citizens, and that they consider the numbers to be negligible. The Ministry of Finance has data, which shows that foreign citizens accounted for 4.8% of purchasers in 2011. Of the 86,000 Israeli real estate transactions, only 4000 were purchased by foreign citizens. Of course, this doesn’t indicate the percentage of “seldom used” apartments, held by these foreigners. The Globes article also clarifies that most of the vacant apartments are owned by Israelis, who seem to collect apartments, if they have the means to do so. The article describes some of the luxurious second homes owned by Israel’s political and business elite; homes that no young couple could afford, even if they were unleashed onto the rental market.

Unlike some Israeli lawyers, who have spoken against increased municipal tax on seldom used properties, I see nothing wrong with a different municipal tax rate, for a vacation apartment, much like taxing a business at a different rate than a residence. Even if this double tax were imposed, though, I question whether it will convince 15,000 owners to rent out their beloved second homes.