"I see a very problematic scenario: a rise in the interest rate and in unemployment. The banks, which give mortgages, have an interest, borrowers have an interest, and it is convenient for everyone to ignore this risk. But we cannot ignore it, which is why we decided on new restrictions," said Supervisor of Banks David Zaken in explaining today's decision - the seventh in three and a half years - to tighten restrictions on mortgages.
Six months after the last intervention, the Bank of Israel today published a series of measures aimed at cooling the housing market. Belying predictions that Zaken would try to reduce the activity of real estate investors, this time he targeted high-risk mortgages, tackling them from three directions: the high monthly payment; variable interest mortgages; and the duration of the loan.
When risk rises
First, Zaken has banned mortgages in which the monthly repayment exceeds 50% of monthly income. In the past year, these mortgages accounted for about 8% of all mortgages, or NIS 4 billion.
Zaken also made it less worthwhile for banks to grant mortgages in which the monthly repayment is 40-50% of income. Banks will have to increase the capital allocated against these mortgages to the same level they allocate capital for business credit.
A bank's requirement to increase the equity against a mortgage will increase the price for mortgages in this category. These mortgages account for 10% of all mortgages, which means that the new monthly repayment restrictions will affect 18% of all mortgages granted.
"A significant proportion of mortgages have a monthly repayment that exceeds 40% of the borrower's income. It should be remembered that this is figure refers to the date at which the mortgage is given. Often, as time passes, the mortgage repayment accounts for a greater proportion of income, which escalates the risk," said Zaken.
Like in America
The Bank of Israel has also placed restrictions on interest. It has capped the variable interest component of a mortgage to 66.7% of the total. Variable interest mortgages currently account for just over 70% of outstanding mortgages, down from over 90% in 2008. The drop in the proportion of variable interest mortgages is due to another restriction imposed by the Bank of Israel two and a half years ago, when it capped the variable interest component of a mortgage to 33% on mortgages of less than five years. The new restriction is added to that one, and does not supersede it.
The third restriction tackles the length of a mortgage. Zaken has banned the granting of mortgages of more than 30 years. These account for 18% of all mortgages, most of which are granted for exactly 30 years, which will no longer be allowed. The ban on 30-year mortgages is because very long-term loans carry high uncertainty and risk.
The Bank of Israel says that it is hard to break down which populations will be affected by the new restrictions. It adds that the restrictions are not unique to Israel, and that similar restrictions have been imposed in recent years in other countries, such as the US and Canada.
Banking sources say that it is premature to judge whether, or by how much, the new restrictions will affect the market. They note, however, that there is a reasonable chance that, in contrast to the previous restrictions, this time there will be a greater effect on the market.
The new guidelines will come into effect on September 1. A borrower who obtains approval in principle of a mortgage from this date, and signs a mortgage by November 1, can also avoid the new restrictions. In view of the tight timetable, there will probably be heavy pressure at mortgage banks in the coming period.
It should also be noted that August is shaping up to be another strong month in the mortgage market. New mortgages granted in August are estimated at NIS 5 billion. Following the new restrictions, it cannot be ruled out that many borrowers will rush to sign mortgage agreements, and the monthly figures could be higher than the initial forecasts.
In a conference call today, Zaken explained the motives for the new restrictions. "The need for new restrictions is quite clear. We see continued rapid growth in mortgages. In the past few months, the amount of new mortgages has risen to NIS 5 billion a month, compared with less than NIS 4 billion a month in 2012. The mortgage portfolio has doubled in the past five years," he said.
Zaken said that he was worried by the combination of rising risk in the economy and the rapid growth in the mortgage market. "When we examined what concerned us, we found that if you combine the rising risk in the economy with the sharp growth in mortgages, a problem is liable to emerge," he said. "There is a scenario in which a rise in both the interest rate and in unemployment is absolutely possible. This, combined with the sharp growth in mortgages, led us to impose the new restrictions."
Zaken emphasized that he was not interested in paralyzing the mortgage market. "We want to see an active mortgage market, but it must be healthy, and this time we decided to reduce the risk in the mortgage portfolio," he said.
The mortgage market has been booming in the past year. If the rate of growth in the coming months resembles the rate in first half of the year, 2013 will see a record amount of new mortgages, in excess of NIS 50 billion.
The main factor driving the boom is the low interest rate, which the Bank of Israel itself has set. On one hand, the Bank of Israel is imposing restrictions on mortgages, while on the other hand, it is fueling mortgages with the low interest rate. Another factor contributing to the rise in mortgages is the VAT hike, which caused homebuyers to close deals before it came into effect. It seems that public is not waiting for government declarations about plans to lower home prices to materialize, because even if the government improves the situation in the real estate market, it will take a long time before the results of any measures taken will be seen.
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2013
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