Fischer Seen Responsible Adult in Israeli Home Bubble: Mortgages
Bank of Israel Governor Stanley Fischer is signaling he’s ready to stave off a potential housing bubble like the one that triggered the U.S. housing collapse, even as the government focuses on re-election.
The central bank announced home loan limits this week while at the same time unexpectedly reducing the benchmark rate to the lowest in 22 months. The directives set a maximum loan-to-value for the first time, restricting mortgages to 50 percent for investors, 75 percent for those who have never purchased a home before and 70 percent for everyone else.
“There is a problem with the real estate market, it can’t be ignored,” Yaniv Pagot, chief strategist at the Ramat Gan- based Ayalon Group Ltd., said by telephone. “The government is in a sort of “end of school” atmosphere. The Bank of Israel, as the responsible adult, will have to let out the hot air until the government solves the problem by increasing supply.”
Fischer’s steps to slow home price growth come three weeks after Prime Minister Benjamin Netanyahu called early elections amid a budget deadlock, caused in part by the government’s inability to fund social-welfare spending promised after consumer protests over spiraling housing and food prices. At the same time, the low rates have fuelled ballooning mortgage debt, raising central bank concerns about the stability of banks.
Israel’s efforts to avert a housing bubble, with prices up about 20 percent since 2010, mirror those taken elsewhere, as central bank efforts to jumpstart growth by pushing down borrowing costs fuels demand for real estate.
In Hong Kong, where home prices have already surpassed their previous record from October, 1997, the central bank tightened mortgage lending on Sept. 14, then last week announced a property tax aimed at overseas and corporate buyers. In Canada, the government shortened the maximum period on mortgages it insures to 25 years from 30 years, and lowered the maximum amount homeowners can borrow against the value of their home to 80 percent from 85 percent.
“Many financial crises which took place in various countries began with the granting of housing credit at terms that did not reflect the risks developing in that market,” the Bank of Israel said in its announcement. “High loan-to-value ratios can damage the ability of borrowers to repay their mortgages if scenarios such as an increase in unemployment or a significant decline in housing prices are realized.”
The Bank of Israel, which forecasts growth this year will slow to 3.3 percent from 4.6 percent in 2011, sees growth slowing further next year. The level of economic risk around the world remains high and domestic growth may be slowing, the central bank said in explaining its decision to cut the lending rate. Exports make up about 40 percent of Israeli gross domestic product.
“Expectations seen in consumer surveys and the Business Tendency Survey are pessimistic and indicate predictions of further moderation in activity,” the Bank of Israel said in its Oct. 29 rate decision.
The Bank of Israel has gradually reduced interest rates from 3.25 percent in September 2011 to 2 percent in the latest decision this week, to help support growth. As the rates declined, housing prices have climbed and mortgage credit has increased.
Household debt climbed by 4.6 percent since the beginning of the year, to 381 billion shekels ($98 billion), while debt for housing rose 5.4 percent to 272 billion shekels, according to central bank figures.
“The Bank of Israel directives are expected to lead to a decline in housing prices, especially in more remote towns,” Dudi Miezlik, mortgage division manager at Mercantile Discount Bank Ltd. said. “The directives will clearly reduce investment activity in the housing market, without hurting homebuyers.”
Housing prices have increased by about 20 percent since the beginning of 2010, and by about 50 percent in the past decade, according to Central Bureau of Statistics figures. In the past six months, home prices have increased by close to 3 percent, the Bank of Israel said in its Oct. 29 rate decision.
The price of a three-and-a-half to four-room apartment in Tel Aviv was about 2.36 million shekels ($610,000) in the second quarter of 2012, according to the statistics bureau. In Jerusalem, the price was about 1.74 million shekels ($450,000), it said.
This isn’t the first attempt by the central bank to rein in the housing market. In May 2010, the bank said it would require lenders to increase provisions against high loan-to-value home loans. In April 2011, the Bank of Israel issued a draft directive limiting variable-rate mortgages to one-third the value of the total loan.
Based on past experience, about 20 percent of borrowers seek mortgages with a loan-to-value ratio higher than the new maximum and will therefore be affected by the new limits, the Bank of Israel said. Almost half of those in this category are investment-home buyers, it said.
Some economists believe Fischer’s most recent steps may backfire.
“The Bank of Israel’s choice to cut the interest rate in order to ease the state of the economy, while at the same time counteracting that step by imposing mortgage restrictions, is liable to instead raise the inherent risk in the ballooning housing market,” says Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd. in Tel Aviv.
Cutting the benchmark rate makes investment in government bonds and bank deposits less attractive, and encourages investors to look for alternative investments, Zabezhinsky said. As a result, additional funds are likely to flow into the housing market and push prices higher, he said.
Pressure is increasing to slow home price growth, leaving Fischer, 69, little choice but to act.
Housing costs were a key factor in spurring protests last year in which tens of thousands of demonstrators, some of whom erected tent encampments, gathered in the center of Tel Aviv and other Israeli cities.
Fischer was appointed governor in 2005 after being offered the job by former Prime Minister Ariel Sharon and Netanyahu, who at the time was Finance Minister. A former economics professor at the Massachusetts Institute of Technology for 22 years, Fischer was U.S. Federal Reserve Chairman Ben S. Bernanke’s thesis adviser and later served as the International Monetary Fund’s No. 2 official in the 1990s.
He’s often warned and acted against complacency. In October 2008, he beat the Fed and the European Central Bank by a day in cutting interest rates following the collapse of Lehman Brothers Holdings Inc., reducing the base rate by half a percentage point to 3.75 percent.
“There’s probably no better central banker in the world than Stan Fischer,” said Glenn Yago, senior director at the Milken Institute, a U.S. economic think tank, in a telephone interview from Israel. “He’s trying to set regulatory standards in order to make demand somewhat more contained so it’s not driving up real estate prices. It makes sense in this context. It’s a creative way to address it.”