Concerns persist about real estate bubble in Israel
Bank of Israel Governor Stanley Fischer met with the Knesset Finance Committee this past week and expressed his ongoing concern about Israel's real estate market. He stressed to the Committee that Israel cannot allow what happened to countries like Spain, Ireland, the U.K. and the U.S. to happen to Israel. Israel has thus far been able to avoid a "real estate bubble" and subsequent crash, but Fischer warned the Committee that real estate prices in Israel cannot continue their rapid rise.
Fischer added, "The essential solution to Israel's housing problem is to increase supply, but the Bank of Israel can only deal with the supply side".
According to the recent Monetary Policy Report released by he Bank of Israel, housing prices in Israel, which started rising in 2008, increased 16% from the first quarter of 2010 to the first quarter of 2011. The report warns that if this trend continues, it could jeopardize the financial and real stability of Israel's economy.
Both the Bank of Israel and the Israeli government have taken steps in the last 12 months to slow down the demand for Real Estate in Israel, but the government's attempts to increase the supply of apartments in Israel have not been real effective to date. The government has tried to slow down demand by increasing the Purchase Tax on apartments purchased for Investment and the Bank Of Israel has been attempting to slow down demand by reducing the amount of money banks will loan on each transaction and by gradually increasing the interest rates. An official from the Union Bank of Israel recently stated that they are loaning less than 60% "loan to value" on their mortgages.
One of Governor Fischer's biggest concerns is that as Interest rates rise over time, more and more people who took out mortgages with variable interest rates will have problems making their mortgage payments. To address that concern, the Bank of Israel recently put a limit on the percentage of variable rate loans the Banks in Israel could make. Although fixed rate mortgages will be slightly more expensive in the beginning, they will be less risky for the borrowers and may even prove to be cheaper over the long term, according to Supervisor of Banks, David Zaken, who was recently interviewed by Globes.
According to Union Bank of Israel CEO Haim Freilichman, recently interviewed by Globes, the segment of the market that has been cooling is activities by Buyer's Groups and buyers of apartments for investment. Freilichman says "there is no longer a stampede for every new project and if that trend continues, we could see a drop in the number of transactions and in the size of new mortgages".
Source: Globes online
May 4, 2011
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