JERUSALEM, April 6 (Reuters) - An Israeli government scheme to make houses more affordable for some first-time buyers by eliminating VAT could actually raise property prices in the short term by boosting demand, central bank governor Karnit Flug said on Sunday.
The government has promised to let certain groups of young buyers forgo the 18 percent value added tax - part of a package of moves to address public anger over spiralling living costs.
Flug told reporters the plan would cost 2.5 billion shekels ($718 million) a year, and force the government to make spending cuts if it wanted to meet its fiscal targets.
"The fact there will be those entitled to the benefit ... may increase demand for housing in the short run and without sufficient supply, that will lead to higher prices," Flug told a news conference.
"I am afraid it will not get the wanted results," she added.
Housing prices have soared about 80 percent since 2007, underpinned by low interest rates and limited supply allocations from the government, which owns 93 percent of Israel's land.
Increases have moderated of late and prices are up 6.3 percent over the past year.
Housing starts were close to 45,000 in 2013 while completions were also above 40,000 - numbers that could ultimately push housing prices lower. Starts and completions were around 30,000 at the start of 2008.
"If these levels can be maintained and include high areas of demand, we can expect a change in trend and diminished pressure in the market," Flug said.
Eliminating VAT for some home buyers could lead other groups to call for cuts in other areas, she added. Once implemented, it will be hard to reverse when the housing situation changed.
Flug said Israel's economy was doing relatively well compared with other developed nations - growth was 3.3 percent in 2013 and the economy was expected to grow 3.1 percent in 2014, with tame inflation.
One negative, she said, was low productivity by Israeli workers - one factor that led the central bank to cut its benchmark interest rate to 0.75 percent in February.
$1 = 3.4818 Israeli Shekels Reporting by Steven Scheer; Editing by Andrew Heavens