There are reports that some people are planning to stop repaying home mortgages. This apparently would be in protest over economic sanctions against IDF draft dodgers. The sudden loss of cash in the Israeli economy may cause a degree of chaos. Is that a good idea? What else ought to be considered?
The risks involved
Nonpayment of mortgage obligations does not seem advisable from the legal or economic viewpoints. If someone has signed up for a mortgage, it is a contractual commitment. Nonpayment of mortgage obligations can harm the non-payer’s credit rating. It will be harder for them to use credit cards and buy things.
Also, the cash is still there in the non-payer’s bank account; it does not disappear from the economy. Instead, the lender will soon start enforcing its loan collateral. For example, guarantors may be called upon to cover the missing mortgage payments. If they refuse, their credit standing may also be impacted.
The lender will presumably lodge a stop on any transfer of title at the land registry (Tabu) until the mortgage is sorted out. A home worth, say, NIS 1 million would be worth far less if you can’t actually sell it. And if a property is repossessed by the lender, it adds to the excess stock of properties in Israel.
The bigger picture
There are reports of a glut of homes, new and built, in the Tel Aviv area and elsewhere. IDF reservists saw income from businesses fall while they were away. Some people who lived close to Gaza and Lebanon have yet to return home and are renting elsewhere.
Medium and high-end properties are selling less well to Jews outside Israel due to the war situation, although antisemitism might start to change that. In short, there is an excess supply of home properties in Israel and insufficient demand. Market prices are starting to dip in some parts of Israel.
Where did all the money go?
The Israeli economy is built on three main pillars: hi-tech, natural gas, and property (real estate). Hi-tech looks like it is prospering, but only because of a few mega M&A deals, e.g., the Google-Wiz deal agreed to last May just closed for $32 billion, and the Palo Alto Networks deal to buy CyberArk Software closed for around $25b. Who knows when the next one will be.
In fact, about 80% of tech start-ups fail. A huge gas export deal totaling NIS 112b. (about $35b.) was recently announced. But the profits will presumably go to the gas companies, to the Israeli government to help plug its deficit, and to Israel’s sovereign-wealth fund to be invested for the future. So, what about Israeli homes and other real-estate investments?
The war has drained the economy and people of spending power. How can demand from the public for homes be increased? What ought to be done?
It seems consideration should be given to allowing mortgage borrowers an income-tax deduction for interest paid on home mortgages. That would benefit people and could help lift the economy as the war hopefully ends.
Currently in Israel, only landlords can deduct loan interest if that expense is incurred in generating rental income. Unlike the United States, Israel does not give a tax break for borrowing to buy a home and live in it yourself. So, consideration should be given to a mortgage interest deduction regarding homes people live in. That should help clear the housing surplus and move the Israeli real-estate market. As an added bonus, some people might even buy a vacation home up North or down South.
As always, consult experienced advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.