The behavior of the market indicates that a steep fall in housing prices is less likely, the Bank of Israel writes in its financial stability report for the second half of 2018. The Bank of Israel's economists believe that the halt in housing prices rises, decline in building starts, and rate of mortgage-taking show an absence of volatility and a lower, albeit far from negligible, probability of a sharp downturn in prices.
The risk to financial stability in the residential real estate market stems mainly from a continue housing price increases amounting to a cumulative 120% in nominal terms over the past decade. This has increased the volume of mortgages taken by the public and the leverage of real estate development companies, while interest rates remained low during those years. As a result of the inelasticity of the supply of housing, demand has outstripped supply, despite the government's initiatives.
The banks have consequently increased their exposure to mortgage credit, which amounted to half of all bank credit. Financial institutions also increased their exposure to mortgages and the construction industry through the credit channel, which accounted for 5.8% of all the loans they granted.
At the same time, households have greatly expanded their exposure to the housing market. The proportion of housing owners with two or more dwellings rose from 2.5% in 2007 to nearly 10% in 2017. "These findings indicate that the period features large-scale demand for housing as a supplement, or even a replacement for, long-term financial savings, on which interest rates and returns are low," the Bank of Israel writes.
These developments increased the risk posed by the residential real estate sector to all of these parties in the event of a steep and rapid fall in prices. The Bank of Israel believes, however, that the risk of this scenario materializing has lessened, among other things because of the slowdown in building starts and the market as a whole, although a substantial risk still exists.
Published by Globes, Israel business news - en.globes.co.il - on December 24, 2018
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