IMF calls for tougher steps on home prices

The International Monetary Fund warns of the dangers to Israel's financial system from a sharp correction in the housing market.

The International Monetary Fund (IMF) warns of continued home price inflation because of the low interest rates in Israel, and calls for further measures to curb price rises, in its latest report to the Bank of Israel, released today.

"If house prices continue to rise, macroprudential measures, notably those which directly restrict the size and risk of mortgages, should be further tightened. Consideration should also be given to increasing temporarily the property purchase tax for non-primary residences. Most importantly, however, concerted efforts should be made toward alleviating supply-side constraints, including by implementing the recommendations of the Housing Committee," the report states.

The IMF also recommends raising interest rates if the economy grows more strongly than expected or if the appreciation of the shekel weakens "including because of policy tightening in major advanced economies." The report also stresses that "the BoI should be prepared to respond nimbly to changes in the economic environment."

According to the IMF report, growth in Israel will be 3.55 this year, falling to 3.25% in 2014. These forecasts include the effect of production of natural gas from the Tamar field. Discounting this effect, growth this year will be just 2.5%. The IMF also stresses that there is a risk that the forecast may be missed. "Externally, the main risks pertain to a prolonged period of sluggish growth in Europe and the United States and growth disappointments in emerging economies. Domestic risks include a further weakening of the tradable sector, a correction in the housing market, and the reemergence of regional geopolitical tensions, which would bear upon sentiment. Risks to the upside could arise from faster-than-expected recovery in Israel’s major trading partners and growth spillovers from the emerging natural gas sector," says the report.

Despite Minister of Finance Yair Lapid's promise that from 2015 "things will get better" and it will be possible to lower taxes, the IMF argues that in 2015 it will be necessary to raise taxes and to make further budget cuts in order to deal with the fiscal deficit.

"For 2015 and beyond, additional fiscal adjustment will be necessary to put public debt firmly on a downward trend. This should include a reduction in expenditure growth, as spending levels implied by the current expenditure rule are very high. However, given the low levels of non-interest civilian expenditures in Israel, relying solely on reducing expenditure growth (by modifying the expenditure rule) will compromise long-term growth and sustainability. Therefore, additional revenue measures will be needed.

The IMF belives that the Israeli economy is on it sway to reducing public debt, and that the debt" GDP ratio can be brought down to 60% by the end of the decade, but it says that a more ambitious goal should be set, and that debt levels should be reduced further.

The IMF welcomes the mortgage restrictions imposed by the Bank of Israel's Banking Supervision Department, and the measures introduced to "bolster the resilience of the financial sector", but at the same time it warns of the danger of a sharp fall in home prices. "A correction in the housing market and the associated feedback loops could undermine banks’ asset quality and profitability, and pose financial stability risks. Moreover, despite progress in addressing concentration, risks concerning the financial viability of some large highly-leveraged corporates (holding companies and real estate and construction firms in particular) remain. It is therefore important that monitoring of risks to the financial sector continues on an ongoing basis, along with periodic stress testing," the IMF report says.

Published by Globes [online], Israel business news - - on December 16, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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