The mortgage interest rate remained stable in August, following a decline in recent months, according to figures published by the Bank of Israel. The mortgage interest rate rose for most of the past two years, resulting in a cumulative 2% increase.
The halt in the upward trend could be the result of lower demand for housing caused by many buyers sitting on the fence in anticipation of developments in the buyer fixed price plan, which was recently expanded. The Ministry of Finance notified 15,000 parties with eligibility for the plan that they had won the lottery, and said that another lottery for an additional 15,000 housing units would be held soon. This measure is taking tens of thousands of potential buyers out of the market.
Demand in the housing market is inelastic, and the supply is not yet equal to the demand. Demand is now faltering, but contractors are also building less. There is concern that the demand will continue to outstrip supply, in which case the surplus demand will lead to an increase in prices, while at the same time the mortgage interest rate will rise.
Another important point is that the increase in the mortgage interest rate over the past two years is unrelated to the Bank of Israel interest rate, which remains a negligible 0.1%. If the Bank of Israel rate is raised in 2018, it can be expected to affect the mortgage interest rate.
On the other hand, some people believe that housing prices are already unrealistically high, and can rise no further. The people taking this view cite the steep drop in the volume of housing deals. A downtrend in the housing market is likely to put a stop to the rise in the mortgage interest rate.
Average interest rate for linked mortgages - 3.71%
The average interest rate on linked mortgages in August (taken in July and implemented by August 11) was 3.71%, compared with 3.69% in July and 3.74% in June. The decline in recent months is attributable to the drop in housing deals, mainly on the part of potential buyers waiting for their turn to buy housing in the buyer fixed price plan.
Unlinked interest rate for more than 25 years - 5.1%
The average interest rate on unlinked mortgages in August was 3.09%, compared with 3.17% in July and 3.23% in June.
The unlinked mortgage interest rate published by the Bank of Israel is the average of the interest rates on unlinked mortgages at variable interest rates and unlinked mortgages at fixed interest. The two types of interest rates cannot really be compared; the fixed interest is safer in the long term, but is higher, while the variable interest rate is lower, but riskier, because it is exposed to a rise in the interest rate.
Published by Globes [online], Israel Business News - www.globes-online.com - on August 28, 2017
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