The price of Stanley Fisher’s mistake – real estate

Good people, professional people, people at the top of the pyramid, people who make decisions are sometimes confused, sometimes wrong. To err is human, it happens and it will happen. It’s a part of life. But the big problem is the confusion – they get confused in defining their role. They are so strong, so confident, so full of themselves that they think they are … your father.

They adopt the paternalistic approach that simply says the following – I do not trust you and therefore I will determine for you what is good for you. Yes, you little kids who do not understand, sit aside quietly.

This approach characterizes many places in government, but it is powerful and influences mainly in the financial spheres. The Treasury knows what is good for you, the Bank of Israel knows best what is good for you. The problem with this approach beyond the fact that “even Dad sometimes makes mistakes,” is that she educates for non-education. Why do you need to know what your money does, if the Treasury defines pension funds for different ages? Why try to put together a mortgage from different tracks, if the Bank of Israel has determined some of the tracks?

The paternalistic approach characterized Stanley Fischer’s tenure as Governor of the Bank of Israel. The respected American professor came to explain to Israelis how to curb the decline of the dollar (bought dollars and created huge losses), how to increase consumption (lowered interest rates), how to avoid heating the housing market (limit the prime interest rate path in mortgages), how to save Israelis from subprime / mortgage crisis (Limit the variable interest rate).

Fisher was absolutely certain he was saving us from a catastrophe. The interest rate is very low, he said when it was 2%. Its natural state is 5%. What has happened since then? It went down towards zero. All right, wrong. that’s not the point. The thing is, he forced us all to take out a fixed-rate mortgage at the expense of a variable interest rate. He forced us to take out a 4% mortgage and not a 1% interest rate. He limited the variable and cheap interest rate on mortgages to one-third of the mortgage volume because he thought that the variable interest rate / prime interest rate would rise. He feared that the public would be dumb and therefore the public would pay the price when the interest rate jumped, and then the variable mortgage interest rate would be higher than the fixed interest rate. He did not imagine that nine years would pass and the interest rate would actually go down, he did not imagine that Israelis (in part) could make a change in the composition of their mortgages when the interest rate began to rise.

The third of the variable interest rate is usually taken in prime minus 0.6% -0.7% depending on the period, and it is a very low interest rate, around 1% per year. The fixed interest rate was 3%, 4% and also of course depends on the time of taking the mortgage and the duration of the mortgage.

In a very big way, Fischer told you – do not take a mortgage with an interest rate of 1%, take an interest rate of 4%, Because the cheap mortgage just looks cheap. When the interest rate in the economy rises, it will cross the fixed interest rate. However, even then it was clear that it would take time, meaning people could change their mortgage vehicles while on the move – reducing the risk in the variable component and increasing the fixed route.

This approach of Fischer has caused immense damage to each of you. How huge? Let’s go for the average – a mortgage of 700-800 thousand shekels that is limited by a third of prime interest rate varies instead of an ideal situation of around two-thirds (as allowed to the public last week). This means an average interest rate on the mortgage that is 1% higher than it should have been – NIS 7-8,000 per year of excess interest due to this restriction. crazy. Consider that mortgages are taken out for an average of 20 years or more, and you will accept that Fischer’s decision cost every family who took out a mortgage NIS 150,000-200,000.

So nine years since the unfortunate decision to limit the variable track route to one-third of the mortgage volume, the Bank of Israel removes the restriction and sets a new threshold – two-thirds. Good morning, Bank of Israel, but who will pay for the damage you have already done?