New Study: Estimating the price elasticity of demand for homes in Israel
The main finding of the study is that price elasticity of demand for homes is -0.046 on average, which is the lower bound of the elasticities calculated in other studies in Israel and abroad.
· Purchase tax in Israel is imposed on residential homebuyers at increasing marginal rates, with brackets updated from time to time.
· We estimate the price elasticity of demand for homes based on the fact that the number of home transactions at the tax kink point—the price at which the marginal purchase tax rate changes from 0 percent to 3.5 percent (about NIS 1.5 million in 2014) is expected to be higher than normal (bunching).
· It was found that the price elasticity of demand for homes by those purchasing a single dwelling (non-investors) is -0.046 on average.
· This is a low level of elasticity, and one may therefore expect those purchasing a single dwelling to have a minor behavioral response to a small change in tax rates.
Evaluating the price elasticity of demand for homes is important for policy makers, particularly for governments interested in assessing how changes in tax rates imposed on homebuyers will affect demand for housing and tax receipts.
In Israel, purchase tax is imposed on residential homebuyers at increasing marginal rates, and purchase tax rates are updated from time to time. For instance, the purchase tax applied to those purchasing a single dwelling (“young couples” and those upgrading their home) increases from 0 percent to 3.5 percent at a price of about NIS 1.5 million (in 2014).
A study conducted by Neelie Ben-Tovim of the Bank of Israel Research Department estimated the price elasticity of demand for homes.
The new methodology used in the study, and thus far implemented only once in the research literature, is based on the fact that in accordance with the usual assumptions regarding individuals’ preferences, the number of home transactions is expected to be higher at the price at which the purchase tax rate changes (bunching). The databases for the study are the files of all residential home transactions between 2008 and 2014 taken from the Israel Tax Authority, cross-referenced with information on purchase tax rates and brackets during those years. The study focused on those purchasing a single dwelling, and on the transition from the 0 percent purchase tax bracket to the 3.5 percent bracket—the largest change in purchase tax rates during the reviewed years.
The main finding of the study is that price elasticity of demand for homes is -0.046 on average, which is the lower bound of the elasticities calculated in other studies in Israel and abroad, all of which used other methods. The elasticity found here is very low, meaning that individuals make only slight changes to their consumption of owned dwellings services due to small changes in price. A possible explanation for the low elasticity is that the change in the purchase tax rate is small, and many individuals may therefore not react to it at all.
 Elasticity is the size of change in percent of one variable relative to a change of one percent in another variable. In this case, it involves the change in the demand quantity of homes (in terms of value) relative to the change in the price of homes.
 The study is an MA thesis, under the guidance of Dr. Naomi Hausman, submitted as part of MA studies in Economics at the Hebrew University of Jerusalem.
 The methodology is explained in detail in Saez, E. (2010), “Do Taxpayers Bunch at Kink Points?” American Economic Journal: Economic Policy, 2(3), pp. 180–212.