Cheap, plentiful credit has without doubt been one of the main factors pushing up home prices in Israel and around the world in recent years. In Israel, home prices rose by 17.8% in the twelve months to the end of June this year, and mortgage loans rose accordingly. Between April 2021 and March 2022, just before the Bank of Israel started raising interest rates, Israelis took mortgages totaling NIS 128 billion, which compares with NIS 79 billion in the corresponding period in 2020-2021, which was itself a record at the time. Five years ago, in 2017, the annual total was NIS 53 billion.
Since March 2022, however, the Bank of Israel’s interest rate has risen from 0.1% to 2%, pushing up monthly mortgage loan repayments and cutting the amount that new borrowers can afford to take from the bank. For the time being, it’s hard to discern any substantial effect on home prices, but the first signs are there.
Around the world too, higher central bank interest rates have made mortgage loans more expensive. The degree to which homeowners are affected varies from country to country. In the US, for example, most homebuyers take fixed-rate, 30-year mortgages, which account for 90% of all mortgage applications, so existing borrowers there are not highly exposed to inflation and interest rate hikes. Elsewhere, mortgage interest rates are fixed for one year only, or else mortgage loans are at variable rates based on official rates. The rising cost of money has led to double-digit declines in home prices in Australia, New Zealand, and Canada, and according to expert forecasts this is just the beginning.
Why isn’t this happening in Israel? How is it that, despite a central bank interest rate twenty times higher than it was six months ago, the momentum in home prices has not changed?
First of all, patience. When you turn the wheel on a big heavy ship like the Israeli residential real estate market, the ship will keep going for a while before it recognizably changes course. A family that has decided to buy a home will not quickly retreat from that decision.
Besides that, interest rates in Israel started to rise only in April, by 0.25% initially, and the latest Central Bureau of Statistics figures for the housing market are to the end of June, before the Bank of Israel stepped on the gas and raised its rate by a further 1.25% in July-August. It will take time before we know what effect the Bank of Israel’s latest moves are having on homebuyers, but there are certainly signs of pressure on the part of sellers and developers, some of whom have had to raise money at much higher rates. A first indication of the effect on buyers can be seen in the August new mortgages total, which fell to NIS 9.6 billion - still high, but the lowest for twelve months and a long way below the March peak of NIS 13.4 billion.
If housing is becoming a buyers’ market, because there are fewer of them (since the average monthly mortgage repayment has risen by NIS 400-500 so far this year, and since there is no reason to buy an investment property when the banks are offering risk-free deposits with similar returns), and because sellers are at a peak of construction and building permits, it’s not hard to see where things are going, even without reference to what is happening in the US and New Zealand.
Nevertheless, it should be borne in mind that there are several reasons why Israel might behave differently from many other countries where interest rates have risen. Demand remains inelastic, even when the central banks starts to raise the price of money. In other Western countries, the real demand for additional housing units is a moot point, when each mother bears fewer than two children and the population is shrinking generation after generation.
In Israel, by contrast, the population doubles every two-three decades, and on average a mother bears three children. Add to that government foot-dragging, when it is the government that has the main responsibility for the rate of supply of homes as the owner of the land and controller of the planning institutions, and the fact that local authorities are really not interested in additional homes and families (local property taxes do not cover even a third of the expenditure on them), and it becomes clear why comparison with other countries is not necessarily appropriate.
Published by Globes, Israel business news - en.globes.co.il - on September 13, 2022.
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