BoI: Higher housing prices threaten economy

'Economic activity in Israel continued to expand in the second quarter, although some of the indicators relating to that quarter point to a slowdown in the rate of expansion.'

By SHARON WROBEL
August 4, 2010 06:57
2 minute read.
Sales of brand new homes dropped 5% in the first q

construction tel aviv 311. (photo credit: Ariel Jerozolimski)

If housing prices continue to rise, it could threaten the stability of the financial sector, the Bank of Israel warned Tuesday.

“Against the background of the low-interest-rate environment, which permits leverage at low cost and increases the feasibility of investment in housing due to the low alternative yields available, apartment prices have continued to rise during 2010 following their rapid increase in 2009,” the central bank said in its inflation report for April to June. “If they continue further, the large increases in apartment prices will have negative implications for the stability of the financial sector.”

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At the end of July, the Bank of Israel raised interest rates for August by a quarter percentage point to 1.75 percent. Although an increase in the interest rate would likely reduce upward pressure on housing prices, the report said, it could also affect other macroeconomic conditions from which a low-interest-rate environment is derived.

Concerned that a housing bubble might be developing, the Bank of Israel earlier this year directed banks to make extra loan-loss provisions for housing loans in which the leverage rate exceeds 60%.

“Apartment prices have continued to rise since the beginning of the year by more than the rate derived from housing- market fundamentals – those factors that affect the capitalized value of housing services,” the report said. “Before the price increases began in 2008, the level of housing prices was less than the long-term level derived from economic fundamentals. Now, however, their increase has brought them close to – and according to a number of indices even higher than – that level.”

The owner-occupied-housing price index has been rising since the beginning of the year and was up 4.3% as of April, the report said. Housing prices have increased at a faster rate than rental prices, it said.

The report expressed concern over the increasing volume of new mortgage loans since the beginning of the year. Most new mortgage loans have been unindexed shekel loans at floating rates, which are affected by changing interest rates.

The Bank of Israel said the fiscal crisis in some European countries would likely have an impact on the economy due to its potential effect on the demand for Israeli exports and the effect on the local capital market.

The economy would likely grow at close to 4% in the next 12 months, and the inflation rate should be about 2.6%, the report said.

“Economic activity in Israel continued to expand in the second quarter, although some of the indicators relating to that quarter point to a slowdown in the rate of expansion,” the report said. “The Israeli economy is expected to continue expanding during the coming years, but at a lower rate than before the recession.”

The recovery in the labor market is continuing, but unemployment is still higher than before the recession, the report said.


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