Israel May Need to Take Steps If Home Prices Rise More, IMF Says

Israel’s finance ministry and central bank may both need to take action if home prices keep rising, the International Monetary Fund said today, while warning of a possible shock to banks’ stability if prices fall.

The Bank of Israel may need to further restrict the size and risk of mortgages, the Washington-based organization said in a report. The government should consider temporarily raising property purchase taxes for non-primary residences, it added.

Current monetary policy is justified because inflation is firmly within the government’s 1 percent to 3 percent target band, and moderate underlying growth is at risk from the strengthening shekel, the IMF said. The low interest rate environment could fuel further house price increases, it said.

The Bank of Israel has gradually lowered the benchmark lending rate to 1 percent to help boost export-driven growth, which has been hurt by the strength of the shekel. Low lending rates have helped fuel home prices, which rose by more than 70 percent between 2007 and 2012 and by 8.6 percent in the last 12 months.

The central bank has already tightened mortgage rules, most recently in August, when it restricted monthly mortgage payments to no more than 50 percent of monthly household income. It has also increased provisions for home loans backed by little equity, capped variable-rate mortgages at one-third the value of the loan, and set maximum loan-to-value limits.

Boost Resilience

While urging steps to contain housing prices, the IMF also warned that a “correction” in the housing market could undermine banks’ asset quality and profitability, and pose financial stability risks. Bolstering the financial system’s resilience to shocks is “imperative,” the fund said.

The Bank of Israel’s exchange rate policy should aim to mitigate risk of the shekel “deviating from levels consistent with fundamentals,” the IMF said. The central bank has been buying foreign currency in an effort to weaken the shekel, which has gained 7.8 percent over the past 12 months, the best performer among 31 major currencies Bloomberg tracks.

The Israeli economy probably grew by 3.5 percent this year, and output will probably slow to 3.25 percent in 2014, the report said. The Bank of Israel said at the end of September it expected 3.6 percent growth this year, and 3.4 percent next year.

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