Mortgage arrears rise steeply

Moshe Kahlon  photo: Eyal Izhar

The trend of increasing mortgage arrears in Israel that started last year has accelerated considerably in the past few months.

Against the background of the storm raised by the Bank of Israel's surprising interest rate hike, a worrying figure that is directly connected to the interest rate has escaped public attention. On the day that the central bank published its interest rate decision, it also updated its home loans data. The figure that lay hidden among the tables was the one for mortgage payments in arrears of more than 90 days: NIS 2.56 billion on November 26. This is the highest figure since November 2012. When the rise in the total value of mortgages is taken into account, the picture looks better. 0.76% of the total balance of mortgage loans is in arrears, the highest proportion since May 2015.

It should be stressed that this is still a fraction of a percentage point of the home loan total, and on an international comparison Israel's position looks good. All the same, we are seeing a worrying change in trend, after a continuous decline that goes back to 2011.

Meitav Dash chief economist Alex Zabezhinsky says that the trend reversed in 2017. "I have been monitoring this figure for a while, and when I mention it I see that people look startled," he says.

But we are still at much lower levels than we were at many years ago.

"True, but then the trend was downwards, and now it's upwards. And what is even more worrying is the rapid rate of change. If it continues to rise at this rate, then within six months we shall reach high levels. It's not a catastrophe; it's even natural that there should be a rise in mortgages in arrears, because the more loans there are, it makes sense that there should be more problem mortgages, but what concerns me is that in the past two to three months there has been a real jump. The rate has visibly started to accelerate."

What's so worrying about this figure?

"It could be a sign that people are starting to get into difficulties, and then we'll see them selling homes under pressure and at substantial discounts."

So they'll cut the price a bit and sell the home. Thanks to the leverage restrictions in place here, we're still a long way from what happened in the US in the subprime crisis.

"That's correct, there's no comparison with subprime, but still, so far in Israel we haven't seen sales under pressure. Mortgage arrears can lead to sales under pressure. In the housing market that has considerable significance. Think of a neighborhood in which people are constantly checking how much this or that apartment sold for - as soon as someone reduces their price seriously, it changes the entire picture, the benchmark is different.

"It's not happening at the moment, because the economic situation is OK, but arrears can be a catalyst. I don't want to be a prophet of doom. We're not seeing a price collapse, but every process starts somewhere. Something is building up here, even if for the time being it's beneath the surface. Besides, the mortgage payments arrears number fits in with the rise in arrears on ordinary bank loans, and it fits in with the fact that every month lately the balance of non-housing credit at the banks has fallen."

The interest rate rise could ensnare more borrowers

The figure showing a rise in mortgage arrears relates to the situation before the interest rate hike. Clearly, in the wake of the hike, many more borrowers will find themselves in difficulties. The interest rate rise only affects the variable element of the mortgage, and will amount to at most tens of shekels a month, but the Bank of Israel Monetary Committee has made it clear that it is ready to raise the interest rate further in 2019.

Mortgage interest rates on the rise

The Bank of Israel has not so far commented on the rise that Zabezhinsky highlights, presumably because it does not see it as a significant problem, at least in its current dimensions. The figure that the Monetary Committee does monitor closely is the mortgage interest rate, which was rising moderately even before the Bank of Israel raised its lending rate.

In the November update it turned out that the average interest rate on index-linked mortgages rose to 3.46% from 3.35% in October. The short-term rate - for loans up to five years - recorded the sharpest rise, to 3.39%, from 3.26% in October.

"The mortgage interest rate has risen slightly in the past few months, in line with the rise in yields on government bonds," the Bank of Israel notes in its interest rate announcement. Following the recent interest rate hike, yields on government bonds shot up, and they now embody an expectation that the Bank of Israel's interest rate will reach 1% in a year's time.

"It's true that a 0.15% rise in the monthly repayment is quite negligible," says Zabezhinsky, "but the recent interest rate hike does more than that, changing the general direction. A rise of 1% in the mortgage interest rate is already a substantial difference that can translate into several hundred shekels on the monthly repayment. That's a very problematic situation for borrowers already struggling to meet their repayments."

Published by Globes, Israel business news - en.globes.co.il - on December 3, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Moshe Kahlon  photo: Eyal Izhar
Moshe Kahlon photo: Eyal Izhar
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