Let’s imagine a car speeding into the abyss. The driver picks up the situation in real time and presses with all his might on the brake pedal, but to his dismay the car responds slowly and the abyss continues to approach. Is the way to stop is to change the pedal and press the gas? This is how the dangerous move of the Bank of Israel (the driver) can be described, which surprisingly decided to press the gas, allow mortgage borrowers to increase their own risk and inflate the real estate bubble even further. And as we all know – bubble bubbles explode, and the public will pay big price .
As if the steep rise in housing prices of more than 100% since the global subprime crisis in 2008 was not enough, the Bank of Israel dropped a bomb this week when it decided to lift the limit on the mortgage component and allow homebuyers to take out a one-third mortgage-linked mortgage. And two-thirds of the prime interest rate track.
The Bank of Israel even stepped up and presented the change as consumer news aimed at easing the mortgage debt burden on the public and lowering the monthly repayment, and indeed mortgage advisers described to us this week how their phone line collapses from a load of calls and customer requests to change the mortgage mix; The real purpose of the bank is of course not the mortgage of the public but the preservation of the stability of the banks and the restructuring of the economy through the refueling of the real estate industry, and the consumer wrapper is mainly a nice marketing move of public relations.
Ostensibly, the move by the central bank is a cause for celebration: the same loan can be taken at an interest rate of Q.currently It is lower. But only ostensibly and with an emphasis on the word today. Even if we assume that the banks will not increase the margin they take in the prime route and allow the Bank of Israel to change to penetrate the public and lower mortgages in the short term (a problematic discount that can be read here), the central bank’s move is problematic for several reasons:
1. Increasing the mortgage amount that each apartment buyer will take.
2. Further increase in housing prices.
3. Pushing the public to purchase apartments at the expense of the rental market
4. Lack of long-term thinking – the interest rate in the economy will rise one day.
Increasing the amount of the mortgage, certainly in tenant price plans
The Bank of Israel’s move will probably only take effect in about a month, but it will mean more apartment buyers taking out new mortgages. People understand that the interest rate on the mortgage will be reduced (the prime component of the mortgage is larger and is at an unnecessary lower interest rate) respectively the monthly repayment is reduced and the meaning – people who could not until now purchase an apartment will now buy. They will take a larger amount. The problem – that the repayment that seems reasonable to them now, may increase and is much more sensitive to interest rates. After all, the Bank of Israel several years ago was very apprehensive about prime-rate mortgages and then imposed a limit. Concerns may have dropped in the near term, but the low interest rate now is a “historic exception” and if interest rates rise, the most vulnerable mortgages are prime-based mortgages. Respectively, the return will also increase significantly.
The monthly repayment will be reduced
People who have not been able to take out a mortgage so far because the monthly repayment was too high for them, will now be able to take out a mortgage. In addition, it is very possible that instead of lowering the monthly repayment, people will simply take out a higher mortgage and purchase a more expensive apartment at the level of the monthly repayment they intended to take anyway. If these things are true for the whole market, then in price-per-tenant programs, in which people are actually allowed to take out mortgages of up to 90% of equity, and not just 75%, this is an even stronger incentive for young buyers.
Further rise in housing prices
The result of the above spin will of course be a rise in housing prices. Already today the demand is much greater than the supply, when according to estimates the supply of apartments increased this year by only about 10,000 apartments. The economic laws are quite simple in this context: when supply is less than demand, and instead increase supply only Pushing more people to buy apartments, the result is a refueling of the market and a further rise in housing prices. And in a country that has suffered the sharpest rise in housing prices in the last decade relative to all OECD countries, this is a particularly painful issue. Smart in their regulation?
Continued damage to the rental market:
Once upon a time, renting was also a legitimate option. Today, it seems that the most sublime Israeli dream is to own an apartment. There is no doubt that it is more convenient, but a lot has been written about the excess economic cost of buying an apartment and according to the economic models it is better to live in rent. In the last decade, housing prices have more than doubled, while rental prices have risen by less than half.
But as we explained, the facilitation of buying an apartment planned by the Bank of Israel will only make more people think about buying an apartment, and give up the alternative – rental housing will rise, the public who have not yet bought will fear that ‘prices will rise next year’ (and rightly so). This is a prophecy that, of course, is coming true: the following year, people who waited will also storm the market, and prices will continue to rise.
Making rental housing such an undesirable option also leads to rising housing prices, because “we all have to buy an apartment,” and once again the demand grows and returns, God forbid.
The increase in interest rates in the economy means half a million shekels in addition to the mortgage:
And despite everything, the real problem with the Bank of Israel’s move is sacrificing the future for the benefit of the present and a lack of long-term thinking. According to expert estimates, already today the average mortgage in the periphery is about NIS 800,000 in the periphery and NIS 1.1 million in Gush Dan. In conversations I had this week, I also heard about mortgages of NIS 1.25 million. When it comes to such alarming numbers, any percentage increase in the mortgage means an increase of tens and even hundreds of thousands of shekels over the life of the mortgage.
For example, if until today with a NIS 900,000 mortgage, any increase in the interest rate was equal to NIS 180 plus the monthly repayment, then according to the new permit from the Bank of Israel, any change in the interest rate would be equal to NIS 360 in the monthly repayment. Sounds negligible? Multiply that by a 20-year mortgage and you will reach NIS 86,000, and in the case of a 25-year mortgage, you will already reach NIS 108,000. And that’s just one percent. Should the interest rate rise by 4% or 5%? (As it was before 2008) Just double everything according to monstrous numbers of half a million shekels, an addition to the mortgage of course.
The only way to escape this huge mortgage addition is to refinance mortgages. Anyone who takes out a two-thirds mortgage on the prime route will have to hang a huge sign inside the house – to refinance as soon as the Bank of Israel makes interest rate hikes.
Sometimes housing prices also fall:
Not many remember, but it is also possible otherwise. Between 1998 and the end of 2007, housing prices in Israel fell by 30%. Although this is another period, which came after a surge in immigration from the Soviet Union, where years the market was flooded with building land, and years of intifada and terrorist attacks did their part, it is still important to remember that apartment prices do not always rise, and everything rises in the end. At the end it crashes with a big noise.
The Bank of Israel is betting on the future of households:
In 2011, the Bank of Israel, headed by then-Governor Stanley Fischer, instituted a responsible policy of limiting the prime component to one-third of the mortgage amount, so that households would not leverage themselves too much and could also face rising interest rates in the economy. However, following the economic crisis of 2008, the interest rate has been ‘stuck’ around 0 for a decade and it can be mistaken to think that this situation will last forever. But when the economic reality improves, the central banks of the world will return to raising interest rates – and the repayments of the public will jump sharply.
It is sad to find that even the Bank of Israel no longer believes that interest rates will ever rise, and worse, the central bank is willing to ‘do good’ to the public in the short term, knowing that it will fatally hurt them in the long run when it raises interest rates. This is how the Israeli subprime crisis is being created. The Bank of Israel is well aware that the public will jump on the ‘bargain’ today, but for the most part will forget to dilute the prime component of the mortgage when interest rates rise (and the truth is that then it will be too late as banks will price increases and raise interest rates on other mortgage routes).
When 30% of the Israeli public is in a constant deficit, when according to studies about 50% of the public will not be able to raise 8,000 shekels even if he can turn to anyone for help, when people are already beyond their capacity and still buy a new car with 100% financing – It is forbidden, simply forbidden, to take such a gamble on the public.
As the responsible adult, the central bank was expected to know that like chess, it is impossible to sacrifice the king (the public) in order to save one of the tools that guard him. Attempts to force the economy by pushing housing prices back into rising prices and sacrificing the future of the Israeli public are a very dangerous move that will take the country many years, if at all, to recover from.