A Housing Plunge Doesn't Concern Israel's Top Economic AdviserBy
Country’s decade-long housing bull market is losing steam
Central bank says economic shock could endanger households
Israel’s economy is strong enough to weather a steep drop in housing prices, according to the prime minister’s top economic adviser, a view at odds with central bank warnings.
With a decade-old housing boom appearing to wind down, Avi Simhon, who heads Benjamin Netanyahu’s National Economic Council, said banks can withstand a 25 percent decline in home prices without any major problems. He added that because the typical value of a loan is low relative to property prices, even a 50 percent plunge, a level typically seen as catastrophic for an economy, wouldn’t destabilize the banking system.
“Very few households have mortgages worth more than 60 percent of the value of their homes,” Simhon, who previously clashed with the Bank of Israel over its foreign currency intervention program, said in an interview in Jerusalem. “The banks’ portfolios are not sensitive to a sharp decline in the value of housing.”
Israel’s Finance Ministry is working to bring home prices down after they more than doubled in the past decade, pricing out thousands of middle- and lower-class families. The Bank of Israel, the regulator for the nation’s banks, has repeatedly warned that the rise in housing credit is a key risk to the financial system.
A confluence of rising mortgage rates and government steps to tax property investors has slowed the pace of home-price appreciation and led to a decline in apartment sales. While policy-makers would welcome cheaper home prices, some fear a steep decline could lead to defaults or a slowdown in consumption.
Restrictions on mortgage lending the Bank of Israel imposed in recent years have helped reduce household leverage. Mortgage obligations as a proportion of income stood at 26.3 percent in August, down from an average 32 percent in 2011-2013, while the average loan-to-value ratio on mortgages granted in August was 49 percent, down from 54 percent in 2011-2012, according to Mizrahi Tefahot Bank Ltd.
The low loan-to-value rate “supports our assessment that even in the event of an extreme scenario where housing prices would plummet, the probability of a financial crisis in Israel is low,” said Modi Shafrir, chief strategist in Mizrahi’s finance division.
The central bank agrees the mortgage market is relatively safe, but its main concern is that housing and consumer debt are both on the rise, and an economic shock would make it harder for households to repay their debt.
If such a scenario led to a sharp drop in housing prices, “it is liable to become an even larger threat to the banks, due to the loss in value of the collateral they hold,” the Bank of Israel wrote in a June 2017 financial stability report.
Israeli law protects the banks from massive defaults because home-owners can’t just declare bankruptcy and hand over their keys. But if homeowners are stuck paying off mortgages they can’t afford, it could make it harder for them to keep up the consumption that has fueled much of Israel’s recent growth.
“Unlike in the USA, you can’t just tell a bank to take your house,” Simhon said. “So it’s hard to see a housing slump leading to major problems for banks.”
If a major recession does come, he added, “then we’d have problems regardless of what happens with the housing industry.”