Commentary: New housing rules won't affect everyone equally

Overseas investors will be the biggest losers from new mortgage regulations.

By MATTI MUNK
311_J'lem Building project (photo credit: Paul Widen)
311_J'lem Building project
(photo credit: Paul Widen)
As the Bank of Israel takes on its shoulders the responsibility of lowering house prices in Israel, the biggest losers will be the overseas investors who are purchasing holiday homes or residential properties in Israel.
Since most of these buyers are purchasing homes in areas that have become over-affiliated with this very specific market, prices in these areas are likely to see a reduction in value over the next 12 months of up to 15 percent, as result of the limitations of receiving mortgages.
Last week Bank of Israel Governor Stanley Fischer dropped a bombshell on the banking world, implementing new rules to quell the booming housing market in Israel.
When the dust settled, it became clear that the average first-time Israeli buyer will not be in the frontline of the attack, and their dreams of owning a home in Israel are unlikely to be shattered.
When one takes a mortgage in Israel, the interest rates are considerably lower than a regular commercial or home-equity loan. This is because the banks have a lower equity-ratio requirement by the Bank of Israel on residential purchase loans, effectively allowing them to make more loans with the same amount of equity. This being the case, they allow themselves to reduce margins on these loans for the benefit of the borrower.
The Bank of Israel effectively put a stop to this lower equity ratio, which will in turn raise interest rates and should lower demand for real estate. However, Fischer excluded from this new decree anyone who abides by one of four conditions: anyone borrowing less than NIS 800,000; anyone who is borrowing 60% or less than the value of the house or purchase price; anyone who has Construction and Housing Ministry eligibility; anyone who takes a fixed-rate for at least 75% of the loan.
The average Israeli first-time buyer should not be damaged by these new decrees. Overseas buyers, however, are likely to receive the brunt of them. They obviously, as non- Israelis, are not eligible for Construction and Housing Ministry loans, and the vast majority of them are buying on the high-end luxury market, asking for mortgages in the range of NIS 1.5 million to NIS 2m.
Since fixed foreign-currency interest rates are relatively high, they are left with the new reality of having to put down as down payment at least 40% of the value of the property.
With many of the banks overseas not allowing, as in the past, borrowers to withdraw equity from their local homes, buyers will have to find more hard cash to purchase in Israel.
The biggest debate is whether the Bank of Israel should be involved in macroeconomic fiscal policies or whether its mandate should remain within the realm of monetary policy.
With these rulings, Fischer’s main aim is to maintain a firm and stable banking system.
He is learning from the mistakes made by US and European banks that continued lending against properties despite the peak in the cycles, creating financial powerhouses to topple when prices dropped. He is also protecting the general public, lured by low interest rates, from borrowing according to their current means, but ignoring the consequences when central banks start raising rates.
The second debate is whether these minor changes in regulations will help lower housing prices. It is obvious to both the central bank and to the government that the Bank of Israel cannot take upon itself this task.
Much has been said about releasing real quantities of lands to increase supply, as reducing demand is a synthetic tool. Little has been said about current building costs, meaning that cheaper land is only part of the complete picture.
Combined with the reduction of land prices, the government can reduce the cost of cement, one of the largest costs in building, by opening this market to competition and reducing the power of one of the most aggressive monopolies in the country.
Together with this, a reduction of taxes on imported building supplies and more industrialization of the sector could turn everyone’s dream of owning a home in Israel into a reality.
Matti Munk is the manager of Mercantile Discount Bank’s international division.