Housing bubble has BoI official on edge

Bank of Israel considered taking steps to reduce mortgage-market risks.

By NADAV SHEMER
April 11, 2011 23:28
2 minute read.
AN ARTIST’S impression of the new development planned on the site of the historic Shuk Ha’aliya mark

Housing 311. (photo credit: Courtesy)

For the first time since housing prices began to surge in 2007, a senior official at the Bank of Israel has expressed concern over a possible financial crisis should the housing bubble burst.

The official aired his concerns during the central bank’s narrow-forum discussion prior to setting the April interest rate, which took place at the end of March and details of which were released to the public on Monday.

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According to the report, “One participant in the discussion expressed concern regarding financial stability if there were to be a sudden drop in house prices, in light of the significant increase in housing credit, although the probability of such a scenario being realized was low.”

House prices increased by an annualized 16.3 percent in January, dropping slightly from the level of 17.5% the previous month, according to the Central Bureau of Statistics. No decline in the volume of new mortgages was evident, the Bank of Israel said.

The narrow-forum monetary policy group is one of two groups that Bank of Israel Governor Stanley Fischer meets with before each interest-rate decision. In the narrow-forum group, four members of the central bank’s management make recommendations to Fischer on the appropriate rate of interest for the economy.

At the end of the discussion for April, all four recommended that he increase the rate by 50 basis points to 3%, a decision that he accepted, exceeding economists’ expectations that he would only raise the rate by a quarter-point.

The report showed that the four members of management discussed whether to accompany the interestrate hike with macro-prudential measures to reduce the risks in the mortgage market.

Initially, the four were split evenly on whether to accompany such a measure with a half-percentage-point interest-rate increase or a quarter-percentage- point increase. However, as it was then decided not to introduce any macro-prudential steps this month, the two participants who initially recommended the quarter-percentage- point increase changed their recommendation to support the half-percentage-point increase.

Aside from the housing issue, the group discussed the possible effect on the exchange rate of an increase in the differential between the interest rate in Israel and rates abroad, and the path of inflation, which rose by an annualized 4.2% to the end of March.

“Among the factors contributing to inflation were housing prices (during the last year) and food and energy prices (in the last half year), factors that are expected to continue to exert inflationary pressure in the coming year,” the report said.


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