The mortgages market is going backwards. The big question is, where to exactly? The average total of new mortgage loans in recent months is similar to the amounts seen at the end of 2020 and the beginning of 2021, but the decline has been gathering momentum, and it could be that the market will continue marching backwards, and at a frightening rate. 2022 will be remembered as a record year for mortgages, but also as the year of a severe crisis. We can see clearly where the crisis began, but there’s no knowing where it will end.
The rise in interest rates had an immediate effect on the residential real estate market, and consequently on mortgages as well, and if we look at the past few months some significant changes are visible.
1. A year of two halves
Last year began with large monthly jumps in new mortgage lending. The total of new mortgage loans in the first quarter of 2022 was 55% higher than in the first quarter of 2021.
In April last year, however, the Bank of Israel started to raise its interest rate, and things gradually died down. Until June, new mortgage lending each month continued to be higher than in the corresponding month in 2021, but from then on the decline set in. From July onwards, the monthly total was lower than in the corresponding month in 2021, except for September, but that was only because in 2021 the Jewish holiday season fell in that month. By the end of the year, the decline reached 40%.
Since data on mortgages precede all the other data on the real estate market, we still have no information about the number of transactions last month, but reports from the field indicate that the number continues to decline substantially in comparison with 2021, so mortgages have probably declined accordingly.
To what level? As mentioned, in terms of mortgages we have reverted to late 2020 and early 2021, but in terms of transaction numbers we are in a period more like 2018. The reason for the gap is that the average mortgage is currently nearly 40% higher than the average mortgage in 2018. This is one of the most important factors still keeping home prices at their high levels.
2. Despite the interest rates, people are buying dearer homes
Is it possible to draw an economic profile of mortgage borrowers? Bank of Israel figures provide food for thought on that. Let’s start with the 80% of the market that consists of home buyers on the free market, not for investment, that is to say, young couples and move-up buyers.
These took mortgage loans averaging NIS 948,000 last month, 12% less than the peak recorded in July 2022, and the lowest figure since May 2021. Investment buyers took mortgage loans averaging NIS 920,000, a much lower figure than the one for last year.
It might be thought that when mortgage loans are lower, this indicates that people are buying cheaper homes and have lower repayments, but that is not what is happening. At the end of 2022, the proportion of home buyers at NIS 3 million and upwards reached 30% of the total of mortgage borrowers. A year earlier, this proportion was 25%. Moreover, mortgage repayments as a proportion of total household income reached 29.1% in December 2022. In December 2021, the figure was 26.6%.
Several things can be learned from this. First of all, rising interest rates have made mortgage repayments so high that even if homebuyers borrow less, they are still making higher repayments than in the past. 47% of mortgage borrowers are making repayments amounting to more than 30% of their monthly income. This is a much higher proportion than in December 2021, when it was just 37%. Both higher interest rates and higher prices contributed to the increase.
On the other hand, buyers of cheap homes have abandoned the mortgage market to a greater extent than buyers of luxury homes. The first to exit the market are those of low socio-economic standing; middle-class buyers still in the market are buying higher-priced homes, taking lower mortgages, and perhaps paying more in equity from other sources, and still, the mortgage is a greater burden on them than in the past.
3. "Buyer Price" buyers are taking higher mortgages
Buyers of homes in the subsidized "Buyer Price", "Reduced Price Housing" and "Home at a Discount" are exceptional in that the homes they buy are sold in projects that come on the market arbitrarily. The prices in these projects remain fixed (apart from index-linkage), and so the level of mortgages is very dependent on the project, and is not at all dependent on price changes in the free market.
In a normal situation, it might be expected that higher interest rates would have the effect of reducing the mortgage loans that these buyers take as well, but the opposite has happened: in the second half of 2022, these buyers substantially raised the mortgage loans they took to buy the homes they had won the right to buy. The average mortgage size rose 40% in 2022, exceeding NIS 1 million in the final quarter.
The reason for this lies in the discount now offered in the Buyer Price scheme. Because of the sharp price rises in the free market in 2021 and 2022, in many places it now amounts to over NIS 500,000. Many people feel that that is too good a proposition to give up, and so choose to take heavy mortgages and a financial risk in order to gain the discounted apartment.
Published by Globes, Israel business news - en.globes.co.il - on January 26, 2023.
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