Israel's top economists responded to yesterday's interest rate cut by the Bank of Israel and its directive lowering the loan-to-value ratio on mortgages.
"The preferred solution for the housing market problem isn't to reduce demand, but to increase supply," said Prof. Avi Ben-Bassat of the Hebrew University of Jerusalem, and former director general of the Ministry of Finance. "The Bank of Israel is providing first aid, but this isn't the desirable solution. Since the day the government took up office, at the start of his term, Prime Minister Benjamin Netanyahu promised reform in land for construction. But four years year later, and 18 months after the social protest, the government still has no solution to the land supply problem.
"The government should act efficiently to increase the supply of land available for construction. Without increasing the supply, the housing crisis won't be solved. The housing market is a resounding government failure in the economics field. We're talking about a double failure, since the government actually identified the problem, and even though it holds the only solution, because the state owns 93% of Israel's land, it did not solve the problem. This is a resounding failure."
Ben-Bassat added, "The interest rate was cut for macroeconomic reasons: the global crisis, Israel's slowing growth, and the reduction was necessary. But cutting the interest rate also lowers the cost of mortgages, and it will therefore boost housing demand and is liable to further accelerate the rise in prices. To offset the negative effects of the interest rate cut on the housing market, the Bank of Israel reduced the ability of borrowers to get mortgages. In other words, a measure on one side helps stimulate the economy, but on the other side there is an offset on the housing market. The macro-prudential measures aim to differentiate between three groups: people without their own homes; people who have a home, but a bigger one; and people wanting to invest in real estate. The Bank of Israel has created a ranking of priorities as it sees fit."
Former Bank of Israel deputy governor Zvi Eckstein said, "The measures taken by the Bank of Israel yesterday allow us to manage a monetary policy that fits in with the general economic situation. On one hand, it enables the Bank of Israel to support and encourage job creation, but on the other hand, it won't cause a surge in prices due to the limits of Israel's housing market, which are mainly due to limits on the supply side.
"There has been a major public sector failure to increase land zoned for construction, including in central Israel. This failure has resulted in the steady rise in home prices, and it now seems that this market is entering a bubble process. Prices are rising, in part because of the easy access to very low-interest loans. The Bank of Israel's directive to limit them will prevent parties from taking low-interest loans and making a profit."
Published by Globes [online], Israel business news - www.globes-online.com - on October 30, 2012
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