"The banking system must streamline," Supervisor of Banks Rony Hizkiyahu said today in a briefing on the 2009 Survey of Israel's Banking System. He called on the banks to restrain their salary costs and warned that the global economic was not yet over.
Hizkiyahu also warned against the emergence of a real estate bubble, while saying that the Bank of Israel would take measures to prevent it.
Hizkiyahu also discussed the stability of Israel's banking system and the bank's improved profits in 2009. He cautioned, however, "The banks should aim to improve their operating efficiency by examining their expenditure function and cutting their operating expenses." In other words, he signaled the banks that they should reduce salary costs.
A key topic of Hizkiyahu's comments related to the real estate market, specifically, mortgages. The 21% in home prices in the past year, and a more than 40% rise since mid-2007, was accompanied by a 52% increase in total mortgages in the first half of 2010. Hizkiyahu is worried that "an upturn in interest would increase borrowers’ monthly paybacks and induce payback difficulties among some borrowers."
Bank of Israel figures underscore its concerns about the increase in mortgage debt. The average monthly mortgage payment rose from 23.4% of the average national salary in 2004 to 26% in the first half of 2010. The average monthly mortgage payment rose from NIS 1,641 in 2004 to NIS 2,164 in the first quarter of 2010.
The average monthly mortgage payment has risen almost 16% since 2007, despite the drop in the mortgage rate in this period. The sharp rise in apartment prices and mortgages has increased the risk for households.
The average mortgage rose to NIS 411,000 in the first quarter of 2010 from NIS 370,000 in 2009 and NIS 273,000 in 2004. Since 2007, the average mortgage has risen steadily, by a total of 36%.
Hizkiyahu said, "There's never been anything like this. The greybeards amongst us remember how it used to be. Once, you took out a 25-year CPI-linked mortgage and went home and paid it off out of your salaries. What do we have now? People are taking high leverage, variable interest mortgages, and are effectively financing the long term with short-term low interest. That's 80% of current mortgages."
Yesterday, Governor of the Bank of Israel Prof. Stanley Fischer raised the interest rate by 25 basis points to 1.75%, partly because of rising home prices.
Hizkiyahu recently issued a draft for consultation instructing the banks to maintain a supplemental loan-loss reserve at the rate of at least 0.75% on account of outstanding loans that have a loan-to-value ratio in excess of 60%. These actions are meant to restrain undesired developments that would ultimately harm public welfare. He subsequently warned the banks of the risks posed by the activities of purchasing groups both to group members and to the banks that finance them, and he issued an instruction about the appropriate treatment of loans of this kind.
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2010
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