Home loans in Israel have continued to fall amid rising interest rates and soaring housing costs, according to figures released this week by Israel’s central bank.
The total value of loans in October 2022 fell to 6.09 billion shekels from 7.7 billion shekels in September and 9.63 billion shekels in August, the lowest value since June 2020, according to the Bank. central. Overall housing market data suggests that this situation is the result of a fall in the number of new home loans rather than a fall in the value of individual loans, with a particularly dramatic drop in the number of new homes sold (down 24% from July to September compared with the previous three months).
With the increase in the average housing price – an apartment now costs an average of NIS 1.9 million – and wages growing at 4% per year, one would logically expect the value of mortgage loans to increase.
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Mortgage interest rates have risen steadily since the start of the year. In January, there was a five-year fixed-rate home loan of 3.1 per cent. In October, the same type of loan had risen to 4.71%. Today, fixed-rate home loans with a term of 30 years show interest between 5.6 and 6%.
Assuming a mortgage of more than 60% of the property’s value (most loans are between 60% and 75% of the total cost), in January there was a variable rate loan of 1.53%. In October, this rate had risen to 4.2%.
The Israeli business daily The marker recently estimated that the average home loan now costs 1,000 shekels more per month due to rising interest rates.
Those watching the market, such as Norman Shapiro, senior mortgage broker at First Israel, believe that rates may still rise slightly, but that any future increases will be more limited. He advised customers taking out a 20- to 30-year loan to choose a fixed rate as long as they can afford the monthly payments.
Shapiro said he wants his clients to “sleep well without worrying about the possibility of skyrocketing prices.”
If the plan is to pay off part of the loan earlier – within three to five years – he believes that it may make sense to take that part of the mortgage at a variable interest rate.
Aaron Krasner, head of Anglo Mortgages, says he is advising people to “move quickly”.
“A bank is only required to honor an offer for a period of 21 days. The Bank of Israel has been very clear that it plans to continue raising interest rates for a number of months, meaning that the supply of mortgages, that’s available today, may no longer be available, to be in a month,” he said. Times of Israel.
October figures from the Central Bureau of Statistics (CBS) suggest that property prices rose 19.8% last year in Israel, compared to a 5.1% increase in the overall cost of living (Consumer Price Index (CPI)) and a 4% rise in wages.
Putting aside concerns about the sustainability of exorbitant prices in Tel Aviv, no one – and especially not Israel’s central bank – expects a dramatic drop in property prices.
Access to mortgage credit is based on a household’s monthly income, and the monthly payments cannot exceed one third of this income. Rising prices increase the barrier to entry to the housing market, even through government-supported programs such as the “Mehir Matara” (Target Price) lotteries, which are always indexed to market prices.
As it is prohibited to borrow more than 75% of a property’s value, as determined by a professional valuer, rising property prices and mortgages can often mean having to appeal to the “mum and dad” wallet to reach the required deposit. Globes reported that the Bank of Israel wants to clarify the rules surrounding so-called “reverse home loans,” a mechanism by which seniors can free up equity to help their children get housing.
Rising borrowing costs are also affecting builders and developers, who have often taken out loans to finance land purchases and construction projects, which they repay via the added value created by the sale of completed apartments or added to a building renovated through the TAMA 38 program. But the increase in borrowing costs makes owners more likely to sell at a high margin and more reluctant to accelerate projects and release funds they may struggle to recoup in the face of the increasingly difficult market.
The construction index (which takes into account certain price increases to reflect inflation in building material costs) had risen relentlessly month-on-month. In September, the increases stopped, which also contributed to a slowdown in the construction sector.
Raul Sarugo, head of the Israel Developers Association, recently said in an interview with Channel 12 that “the decision to raise interest rates sharply again is a dangerous sign.”
“The distorted view that higher interest rates will take care of the housing crisis is a bitter mistake,” he said, arguing that it will have a negative impact on the financing of construction.
The outgoing coalition government believed the key to controlling house prices was to increase the pace of construction. If Sarugo is right, the private market will not provide the housing needed to stem the continued rise in house prices.
The Bank of Israel has expressed confidence in the Israeli economy as a whole. In an interview with Reuters last month, Bank of Israel chief Amir Yaron said he believed global price pressures were easing and that he expected inflation to fall next year.
Asked specifically about housing interest rates, Yaron said that while the prospect of rising interest rates is “painful” for those with mortgages and other outstanding loans, he believes “it will actually help avoid the need to raise interest rates” in the future.
The central bank has said the new government will need to promote the reforms needed to maintain Israel’s economic strength – high employment, low inflation and constant pressure to reduce the runaway cost of living.