More than the worrying pace of price increases in the housing market, what concerns the Bank of Israel in weighing its interest rate decision is the rate of inflation. That is, unless the housing market starts to present a danger to the stability of the economy, which is something that the bank does not at present see on the horizon. So, while the Bank of Israel does talk of an interest rate hike in the coming months, this is not with the aim of cooling the housing market. The considerations are different: chiefly inflation and the rise in interest rates in the US.
All the factors justifying a rise in the interest rate hike from its current zero level have lined up in a row: strong economic growth figures; a low unemployment rate; and inflation that, although lower than in the US, is above the target range. All this is even before the consequences of the conflagration in Eastern Europe are taken into account.
The leading cause of inflation, in February as in preceding months, is identified as the disruptions to global supply chains, and higher interest rates will not solve that problem. They will, however, weigh on disposable incomes to some extent, particularly for those paying off mortgages.
One sentence that Deputy Governor of the Bank of Israel Andrew Abir said to "Globes" six weeks ago gives a partial picture of the Bank of Israel's stance on interest rates and the housing market, and on the way that the decision makers believe that the dramatic price rises, which reached 13% in the year to the end of February, should be dealt with. Commenting on the possibility than an interest rate hike might cool the housing market, Abir expressed concern that higher interest rates would hit those with mortgages: "We could raise interest rates, but then young couples would not be able to buy homes, which would lead to a fall in prices. And what would that achieve? We would cause problems not just to the young couples seeking to buy a home, but also to those who have taken variable-rate mortgage loans," Abir said.
Inflation, however, makes the index-linked component of a mortgage more expensive, so that standing back and not taking steps to curb inflation will hit mortgage borrowers in any case, unless inflation recedes. Until the invasion of Ukraine, there were good reasons to think that inflation would do just that. The February Consumer Price Index reading indicated some decline in imported inflation, but the crisis in Eastern Europe could change the picture.
To return to the housing market, in the same breath, Abir added that the real solution was simply to build more homes, which brings us to the program of Minister of Finance Avigdor Liberman. "The moment that the market has confidence in the government's plans, and that it is going to execute them, prices will adapt themselves, and there will be no need to wait two or three years. People should be certain that there is a real plan to expand the supply of housing," Liberman said.
A study by the Bank of Israel carried out last year found that the growth in incomes and the shortage of homes were the causes of the rise in home prices. According to the Bank of Israel Research Department, the low interest rate policy in place since the subprime crisis has played only a secondary role in the rise in home prices after 2008. Even if interest rates are raised, they will still be low by historical standards, and it is doubtful whether this alone will even up the gap between supply in the housing market and demand, which will only rise as the population increases.
Published by Globes, Israel business news - en.globes.co.il - on March 21, 2022.
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