Interest rate cuts will not cause a sharp rise in home prices, as happened in 2008-09, according to the minutes of the Bank of Israel interest rate decision for February, which were published today. The Bank of Israel, under Governor Stanley Fischer, cut the interest rate by 25 basis points to 2.5%, and analysts expect more interest rate cuts in the coming months.
"It seems that a trend change is taking place in the housing market," says the Bank of Israel in the minutes. "Members pointed to the measured decline in home prices, the decline in volume of new mortgages granted, as well as the relatively high level of housing starts. In light of these developments, and the limitation on the share of the floating rate component of mortgages, the effect of a reduction in the interest rate is expected to be moderate."
Fischer has been criticized for cutting the interest rate, due to fears that it will cause a new surge in home prices, as happened in 2008-09. A demonstration was held outside his home in Herzliya Pituah last night. Social activists say that his policies are sabotaging efforts to take the air out of the real estate bubble.
Fischer counters by saying that the restrictions on mortgages imposed by the Bank of Israel over the past year will neutralize the effect of interest rate cuts. Housing data published in December indicate resurgence in the housing market, including a sharp increase in home sales and an increase in new mortgages.
In addition, the Consumer Confidence Index, compiled by Globes Research and pwc Israel, reports a jump in the number of people considering buying an apartment in the next six months. After 1,935 homes were bought in December, the index for January found that 9.8% of respondents do not rule out buying a new or second-hand apartment in the next six months.
In the minutes of the February interest rate decision, the Bank of Israel says, "The source of funding difficulties in the real estate market is a result of the risk in the sector. These find expression in, among other things, the Bank of Israel's Companies Survey, in which companies in the industry report a sharp increase in the demand constraint they face, along with a more moderate increase in the credit constraint as well."
The main argument made in favor of the interest rate cut was the continued slowdown in the growth of the Israeli economy, which was expressed both in domestic demand as well as in exports, and the expectation that this slowdown will probably continue. Since the interest rate has a lagged effect, it should be reduced now rather than later. The council members who supported this view also noted the downward revision of global growth forecasts, and the slowdown in growth of domestic demand, which are expressed in, among other things, a decline in turnover in trade and services industries, and a decline in home prices. They also noted that the inflation environment, which is near the center of the target range, allows an interest rate cut, and that the Bank of Israel's limitations imposed on the mortgages sector weakened the transmission from the interest rate to home prices.
One monetary committee member countered that, in his opinion, there is no real deterioration in the state of the economy and that it is possible to wait with an interest rate cut until the dimensions of the crisis in Europe are clarified.
Published by Globes [online], Israel business news - www.globes-online.com - on February 6, 2012
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