The moves are relatively drastic so the Bank of Israel prefers not to use them, unless it feels it has no choice.
The banking supervision department at the Bank of Israel has finished preparing a plan to moderate demand in the real estate market, by setting sharp restrictions on mortgages.
Currently, it appears that the rise in home prices has moderated, but the banking supervision department, headed by Supervisor of Banks Rony Hizkiyahu, will consider implementing the plan if there are indications of price rises continuing at the pace of the past year.
The moves are relatively drastic so the Bank of Israel prefers not to use them, unless it feels it has no choice. The moves include restrictions on adjustable rate mortgages, on large loans, and limiting the size of possible loans.
A central bank source said, "We will not allow anther rise of 20% in a year."
The central moves are: Banning taking an adjustable rate mortgage above a certain limit, apparently 30%, of the overall loan. Adjustable rate mortgages are significantly cheaper than CPI-linked loans, so limiting their proportion will automatically make the loan more expensive to consumers. An even tighter regulation, which the bank defines as a "doomsday weapon" is a complete ban on adjustable rate mortgages. Setting a tough limit on the amount of financing - a blanket ban on granting mortgage funding above 60% of the total amount. In this case, new customers will not be able to take out a mortgage above the allowed limit, no matter what the interest rate to be paid, and will have to bring the rest from their own sources. Banks would be required to allocate a special reserve for each loan above NIS 1 million.
The Bank of Israel believes that the gap between supply and demand is several thousand apartments per year, and if these steps remove some potential buyers from the market it will lead to equilibrium between supply and demand, and any price rises will be more moderate.
However, there is a concern at the Bank of Israel, as it moves to influence the real estate market, with regard to using tools that are not meant for that, while there remains a serious lack of knowledge. The reliability of the existing data is still doubted, and the market's status becomes clear only after a considerable lag.
Published by Globes [online], Israel business news - www.globes-online.com - on October 12, 2010
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