IMF sees risk in Israel's housing market

The low interest rate environment could fuel further house price increases, but crash of prices still a risk, IMF says.

December 16, 2013 15:15
2 minute read.
Stone houses in Jerusalem

Stone houses in Jerusalem. (photo credit: Adi Benzaken)


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Israel’s low interest rate environment bears the risk of further boosting housing prices, the International Monetary Fund said Monday, but the possibility of a quick adjustment in prices is also worrying.

In the concluding statement of its annual consultation, the IMF said that Israel was conducting proper monetary policy given the strength of the shekel and the global environment.

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“The low interest rate environment could, however, fuel further house price increases,” the report said. “If house prices continue to rise, macroprudential measures, notably those which directly restrict the size and risk of mortgages, should be further tightened.”

The IMF recommended increasing property purchase tax for non-primary residences temporarily and, crucially, taking measures to boost the housing supply, “including by implementing the recommendations of the Housing Committee.”

Despite the difficulties posed by the increased prices, the IMF said that a crash of prices posed an economic risk to Israel.

“A correction in the housing market and the associated feedback loops could undermine banks’ asset quality and profitability, and pose financial stability risks,” the report said.

“Despite progress in addressing concentration, risks concerning the financial viability of some large highly-leveraged corporates [holding companies and real estate and construction firms in particular] remain.”

All in all, the IMF mission found Israel’s economy to be growing moderately, projecting 2014 growth to fall somewhat to 3¼. The greatest risks posed to the economy are external – sluggish growth in the United States and Europe mean less demand for Israeli products abroad.

The IMF praised Israel’s improved fiscal situation, but said that challenges remain ahead.

“For 2015 and beyond, additional fiscal adjustment will be necessary to put public debt firmly on a downward trend,” the report said.

More taxes would be necessary, and the report recommended fewer “distortionary” tax exemptions, and an increase in the value-added tax as well as taxes on negative “externalities” such as congestion and pollution.

Because Israel has proven inconsistent in its approach to fiscal targets, which “have often been missed and revised,” the report said stronger safeguards were required to boost its fiscal credibility, such as an independent fiscal council.

In 2012, Israel doubled its deficit target, and then overshot it. In 2013, Israel is to come in well below its rather high target for the year. In addition, a flush of unexpected tax revenues led Finance Minister Yair Lapid to cancel expected income tax increases for 2014.

Regarding interest rates, the IMF warned that the Bank of Israel should gradually raise them if its economy grows faster than expected and the shekel’s appreciation eases.

For now, the IMF said, maintaining the current monetary policy is justified by the risk to growth from a strong shekel and weak external demand.

Israel’s benchmark rate stands at a four-year low of 1.0 percent as the central bank takes advantage of tame inflation to support the economy.

“If growth turns out to be much stronger than expected or if appreciation pressures on the shekel ease, including because of policy tightening in major advanced economies, the Bank of Israel should gradually normalize monetary policy,” the IMF said.

The Bank of Israel next decides on interest rates on December 23. It left rates unchanged in the prior two meetings after a rate cut in September.

Reuters contributed to this report.

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