Governor of the Bank of Israel Prof. Stanley Fischer has much to worry him these days. He does not hide is concern about the economic situation in Europe, or about the effects of the global financial situation on Israel. Now, he has spoken about another worry, this time a home-grown one: the housing market.
It should be made clear that this is not an Israeli version of the sub-prime crisis. Israel's mortgage market is not a source of possible financial instability. The banks have sufficient collateral, the loans-to-value ratio is limited and supervised.
Fischer is worried about the financial standing of contractors, who bought land and began building on the basis of high prices, and now find themselves with apartment prices that will make it very difficult to cover their debts. Since credit to contractors amounts to 20% of the banking systems' total credit, a crisis in the industry will have massive impact on the country's banks.
It should also be noted that even if a rapid drop in home prices does not result in collapse, or even pose a serious threat to any bank, Fischer still has what to worry about. Fischer and Supervisor of Banks David Zaken want to boost the banks' shareholders equity and available reserves to cope with the global crisis. That is why, as far as Fischer is concerned, an erosion of the banking system's capital base is always a worrying development, and when it happens when there are storm clouds on the global financial horizon, the worry is even worse.
It should be noted that Fischer is well aware that talk about "market forces" won't really help him here. A translation of his remarks to Minister of Housing and Construction Ariel Atias into simple English is, however, a real warning. The government efforts, especially by coalition partner Shas, to take pride in the rapid fall of home prices is liable to cause major harm to the financial system and the entire economy.
Fischer therefore asks for the Ministry of Housing to adjust its policy to needs of financial stability, and to bring about a gradual reduction in prices that will enable contractors to adapt to the new reality and limit the occurrences of insolvency.
Atias, for his part, needs a kind of claims insurance against his colleagues in his party and government for more even more drastic policies to lower home prices. The haredi (ultra-orthodox) community, to which Shas partly belongs, definitely expects it, hence Atias's need to leak Fischer's remarks.
It is doubtful if Fischer really expected such remarks to remain in confidence between him and Atias. In any event, Fischer obviously will not rely solely on actions by Atias, and the Banking Supervision Department will presumably issue a series of directives in the coming months to further restrict credit to contractors and increase the necessary collateral. The real estate industry will have to adapt to what the Bank of Israel deems reasonable in the present circumstances.
Published by Globes [online], Israel business news - www.globes-online.com - on November 24, 2011
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